Loser, you highlighted the big growth in the volume of derivatives as a "secret" which it is NOT.You are the naive clown.
I am not the one who wrote that article and quoted that as a "secret". If you can't read by clicking on the URL link, STFU, you dumb F moron.
The derivatives market is indeed huge, but the numbers look misleading...in the sense that say one firm has $1 billion in S&P futures long but $ 1 billion in Russell futures short: total is $ 2 bil but net exposure is pretty small due to the hedging...
That's the title of the article from that website you nit wit. I am not the one who termed it "secret"
There is some else on the other end every derivative position. As some one said the $$$ changes hands when things shake up. When it "disappears" is when the losing side is unable to meet it's obligation (ei Capitol management). The ensuing pucker-factor on everyones part causes economies to lockup, which is the real danger. I don't think our current credit crunch is exactly a leverage-based blow up. Lots of historically conservative entites bought high-yield lower tranches of mortgage-backed income flow, which are now worthless. Someone(s) are on the winning side of these transactions...
OK I've always wondered, what is the purpose of this? You make on one position, and lose on the other...
The future cash flow is the same, but it has a new owner. The new owner is purchasing the same cash flow that was priced higher in the past, but at a lower price. The difference in price is what they declared as loss. The cash that is lost will appear in the account of the new owner but in the future. It is the perception and the forced sale of the future cash flow that changed. When that happens, cash leaves someone's account, and heads to another account, but it may take time for the cash to make his appearance in the new owner of the cash flow. If the future cash flow does not appear as scheduled in the future, then the home owner (where future cash will originate) would have consumed that cash, and if his home is upside down, then let say he sticked it to the cash flow owner, who sticked it to the banks (and the succession of sticking continues). That is how debts works when the asset bought with the debt does not grow faster than the cost of debt. In such case, some of those holding lending positions (somewhere in time, past present and future) will be sticked to. That is why in a recession smart people buy bonds with no risk of default. Because they know that in recessions some of the lenders (even the past lenders with a remaining cash flow) will get sticked. Things are linked in time. Think deeply and you may get it. PM me if you wish.