Derivatives, mother of all bubbles

Thanks for the link, Banjo.
I never thought about the CDS insurance losses...wow.
:eek:

 

Reading this really makes me conclude that this price action in equities/commodities might be related to forced margin call selling by CDS sellers on this FNM deal.

Wonder when it ends.

 

Futures avoids predatory pricing by monopolists and the like, averts market crisis and adds integrity to financial exchange.

http://en.wikipedia.org/wiki/Dojima_Rice_Exchange
http://en.wikipedia.org/wiki/Futures_exchange

 

exactly.... futures markets are necessary and vital..they are for hedging and speculating just like you moronic day trading stock fools

 

Derivatives aren't inherently dangerous but they let companies hide true exposures/levarage and let portfolio managers get around investment policy constraints.

 

Yup, as most derivatives are traded b/w 2 parties and it's zero-sum.

 

What that could mean is that correlated instruments could become uncorrelated for no apparent reason. It's real easy to find correlated publicly traded instruments. An intern with Excel can do that seemingly. Understanding the correlation is another story, and with all these jokers in the deck [derivatives] it may become worse.

 

I’m not an accountant or derivative player but an outsider looking in.
The RE subprime was brought about by financial institutions lending copious amounts of money to copious people in the USA who didn’t have the asset backing or means to repay the loans.
Bear in mind the loans were most often no more than 100% of the value of the property.

I see similarities now where we have every man and his dog jumping on the derivative band wagon and not having the skill nor asset backing to pay the loan (leverage) which they have borrowed, the leverage often well above 100%.
The financial institutions again involved and allowing every back yard small time punter to participate.
This especially noticeable in the UK and Australia with CFD’s [Contracts for Difference] where the retail clients are very much involved.

Derivatives are often used by the retail client to speculate with directional price movements jumping on momentum pushing prices to extremes in one direction or another. This to uncomfortable levels where companies can suffer extreme pain, eg shorting a company down.

I see this as a two edged sword where the derivative speculator can also become unwittingly exposed.
It just takes some very large violent swings in volatility to knock these guys off their perches.

Is it possible that a gigantic wave of margin calls could set the house of cards to topple ?

If so, what are the ramifications of this ?

The subprime mess is largely evolved from the USA but has spread around the globe.
The derivative house of cards, this is available in every continent, it’s like a runaway bus with no-one in control other than financial institutions who appear to have a very short term goal of making as much money as possible and to hell with the consequences.