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 Derivatives: The Unregulated Global Casino for Banks 
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Joined: Thu Mar 31, 2011 4:00 pm
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Post Derivatives: The Unregulated Global Casino for Banks

Derivatives: The Unregulated Global Casino for Banks


Pick something of value, make bets on the future value of "something", add contract & you have a derivative.

Banks make massive profits on derivatives, and when the bubble bursts chances are the tax payer will end up with the bill.

This visualizes the total coverage for derivatives (notional). Similar to insurance company's total coverage for all cars.


A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else.

Ex- A derivative buys you the option (but not obligation) to buy oil in 6 months for today's price/any agreed price, hoping that oil will cost more in future. (I'll bet you it'll cost more in 6 months).

Derivative can also be used as insurance, betting that a loan will or won't default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value.

The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative.

Most large banks try to prevent smaller investors from gaining access to the derivative market on the basis of there being too much risk.

Derivative market has blown a galactic bubble, just like the real estate bubble or stock market bubble (that's going on right now).

Since there is literally no economist in the world that knows exactly how the derivative money flows or how the system works, while derivatives are traded in microseconds by computers, we really don't know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough times, that will be catastrophic for the world financial system since the 9 largest banks shown below hold a total of $228.72 trillion in Derivatives - Approximately 3 times the entire world economy.

No government in world has money for this bailout. Lets take a look at what banks have the biggest Derivative Exposures and what scandals they've been lately involved in. Derivative Data Source: ZeroHedge.


Thu Dec 06, 2012 8:07 pm
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Joined: Mon Apr 11, 2011 6:55 pm
Posts: 6494
Post Re: Derivatives: The Unregulated Global Casino for Banks
From notes:

Derivative is:
1. One or more underlyings (Specified rate, price, variable), notional amounts (unit of measure- shares, bushels, pounds...) or payment provisions.
2. No Net Investment Required or one that is smaller that would be required for similar contracts.
3. The terms permit a Net Settlement or can be settled outside the contract.

Common Derivatives:
Option Contract
Futures Contract
Forward Contract
Swap Contract

OPtion Contract
Option to buy or sell. Must pay a premium.
Call option --> Right to Buy
Put OPtion --> Right to Sell

Futures Contract
One party takes the long position (Buy) another takes the short (sell)
Obligated to buy/sell at a future date with standardized notional amounts and settlement date.

Forward Contact
Same as Futures except:
Privately negotiated through intermediary rahter than a clearing house. NO standardized notional amounts or settlement dates.
Terms established by the parties.

Swap Contract
Private agreement between two parties assisted by an intermediary to exchange future cash payment.
-Interest Rate Swaps
-Currency Swaps
-Equity Swaps
-Commodity Swaps

Derivatives and Hedging Activities:

Not used for Hedging
--------Gains and Losses are recognized in-----> Current Earnings

Hedge against FV change
Must be highly effective
-------Gains and losses recognized in------> Current Earnings (offset Loss & net the amount)

Cash Flow Hedge
Hedge against variability in future cash flows from a specified risk
-------Ineffective Portion-------> Current Earnings
--------Effective Portion----Deferred Gains and Losses----->Other Comprehensive Income

Foreign Currency Hedge
Hedge against foreign currency variability
-Currency FV Hedge -------> Current Earnings
-Currency Cash Flow -------> Same as cash flow shown above
-Currency Net Investment ------> Other Comprehenisve Income as Cumulative Translation

Effect on Cash Flows:
Derivative (NOT a hedge) --> Investing Activity
Derivative to trade --> Operating Activity
Derivative to hedge --> Same as hedged item

Thu Dec 06, 2012 9:27 pm
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