Understanding Derivatives

[Conchis]

So...to make this circle a little more complete.... Suppose you are a huge company and you want to borrow some money. You can borrow money on a floating rate that's tied to LIBOR say...Libor plus 100 basis points OR you and borrow at a straight percentage of say 7%. You look at today's LIBOR and say WOW...that's a lot cheaper I'd like to do that, but what happens if the LIBOR rate changes dramatically? You buy a derivative that is called a interest rate swap. It's a financial instrument that pays you if the interest rate goes above 7% by more than a certain amount and that you pay if is less that 7% by more than a certain amount.

This fixes the real interest rate exposure that you as the borrower have. So here comes the rub....Suppose it's the bank that's underwriting the company that is carrying the interest rate swap? That company owes you money and if they go under all of sudden the bank is at risk because that company has under written Billions and Billions of these swaps... do you remember that banks were caught manipulating LIBOR? Suppose it's the bank that directly sold the swap? LIBOR rates are tied into many of the financial derivatives.

[Jeffrey]

Posted by Conchis (here)
So...to make this circle a little more complete.... Suppose you are a huge company and you want to borrow some money. You can borrow money on a floating rate that's tied to LIBOR say...Libor plus 100 basis points OR you and borrow at a straight percentage of say 7%. You look at today's LIBOR and say WOW...that's a lot cheaper I'd like to do that, but what happens if the LIBOR rate changes dramatically? You buy a derivative that is called a interest rate swap. It's a financial instrument that pays you if the interest rate goes above 7% by more than a certain amount and that you pay if is less that 7% by more than a certain amount.

This fixes the real interest rate exposure that you as the borrower have. So here comes the rub....Suppose it's the bank that's underwriting the company that is carrying the interest rate swap? That company owes you money and if they go under all of sudden the bank is at risk because that company has under written Billions and Billions of these swaps... do you remember that banks were caught manipulating LIBOR? Suppose it's the bank that directly sold the swap? LIBOR rates are tied into many of the financial derivatives.

Thanks. Here is a good video explaining interest rate swaps.

Source: https://youtube.com/watch?v=uVq384nqWqg

[Jeffrey]

Source: https://youtube.com/watch?v=Wjlw7ZpZVK4

[Jeffrey]

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Warren Buffett on Derivatives

Source: https://youtube.com/watch?v=KGrQv1fZ0jU

That was a few years back ... and now?

Source: https://youtube.com/watch?v=svr6Fld8wuA

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Forget Dudd-Frank If You Want To Control Derivatives

The April 5 Wall Street Journal reports the that the Commodity Futures Trading Commission (CFTC), headed by Gary Gensler, has stopped writing and proposing "swaps" regulations for the Dodd-Frank Act, due to its "internal divisions" in the Commission.

CFTC, which at first led other regulators in announcing Dodd-Frank rules, hasn't voted on one since last July. With Dodd-Frank a derivatives Dudd, Wall Street broker-dealers have moved to create new, "modified" derivatives products, says the Journal, forms of CDS and interest-rate swaps, to which the CFTCs earlier rules won't apply! They've also created new, unregulated exchanges for derivatives, so that the government-created exchanges recommended under Dudd-Frank won't be used (should they ever start operating).

Source: http://larouchepac.com/node/26154

[Jeffrey]

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Here's a really good video. This man gives an excellent metaphor for how the derivatives market bleeds out the financial system like an infestation of fleas on a dog. It also gives you an idea of how long this bubble has been inflating, and how integrated it is now. I'm still reading, but if housing was the last bubble to pop due to derivatives trading then food is next. Yes, a bursting food bubble. We thought the housing bubble was bad.

John Hoefle on Financial Derivatives (1990s)

Source: https://youtube.com/watch?v=mvcOHUAwXeY

Source: https://youtube.com/watch?v=oY-h1gzmxKg

[donk]

I was told by the CEO of the US Chamber of Commerce (when I was worried about these derivates and Housing bubble and peak oil) that he wasn't worried about the dollar then (04 or so) because there was so much liquidity--he kept repeating that word and oil wasn't a concern to him as much as water--he said it solemnly and was surprised I was bringing up resource scarcity.

Don't they just call "bubbles" on necessary goods (like food) inflation?

[Jeffrey]

I think so. I read that the inflation is tied to the derivatives trading in that particular market.

Same thing with the dot com bust, oil, and housing.

Its like the derivatives game isn't a bubble in itself, but its a bubble maker.

[gripreaper]

Well, as you have so eloquently pointed out, derivatives are bets upon bets upon bets, to the tune of somewhere around 600 trillion to 1.2 quadrillion, over ten times the GDP of the entire planet. It is a ticking time bomb, to say the least, which requires a minimum of 2% extraction each month to kick the can down the road and to keep the ponzi scheme going, and to avert a collapse.

In my view, the derivatives were designed as just another way of extraction from the world economies into the hands of the few, in order to foster such a collapse for the express purpose of ushering in the centralized control grid, the global digital economy.

It has no basis in any economic model which is tied to GDP, basic commodities, or currencies in general. It's a casino for the elite to gain more power by leveraging their own debt instruments to which all currencies are tied. It's the Achilles heel, the albatross, the Trojan horse, the elephant in the room. When it goes "boom" it's a global scenario.

You can fill in the blanks of what that will look like.

[Selene]

Wow, Vivek and friends. You’re braver than I thought, to tackle understanding derivatives. It’s perfectly normal for your head to spin and your brain to fizz on this. Among my degrees is an MBA in Finance, a CFA, Elliott Wave certification – and a few years trading golds, currencies and oil futures on the CME – and I still don’t really have an actual grasp of this. (And no, I have no better idea than anyone else about the future of the economy/dollar/etc etc.)

Some basic truths:

1. Nobody actually ‘understands’ derivatives. Nobody. Not Goldman. Not the traders. Not the quants, nor the geniuses, the economists, the accountants, or the slick salesmen (aka “your financial advisor”.)

2. Everybody thinks that ‘someone else’ really understands this stuff. They don’t.

3. Everyone believes that at the end of the day, somewhere, it all makes sense. It doesn’t. It is the perfect ‘pass the potato’ Ponzi scheme where data circles around in an endless whirl, a stream far too swift and complex for anyone to measure, a con game of gigantic proportions, a recycling scheme of which Mother Nature would be in awe. There’s no final accounting of the individual parts until all-fall-down. Everyone believes that someone else will pay up. They won’t. They can’t.

4. Nevertheless, a lot of banksters can make a lot of money in the meantime. That’s the business they are in: A smile and a shoeshine. And a nice fat fee. Everybody’s happy.

If you’d really, really like to read the most amusing, insightful and human-sized explanation of what a weird and wonderful world derivatives are, I most highly recommend Michael Lewis’s wonderful book “The Big Short”. Lewis has an exceptional gift for conveying complex financial ideas via the most extraordinary and entertaining character studies of the key players, and it’s a good read besides. He’s the best. He knows the banks and trading floors inside out. You’ll learn more from his wit and wisdom than all the textbooks out there. And have some fun on the way.

Sorry, my computer is shorting out and failing these days… I may be a few days offline here. I’ll try to read here , if not file…

Cheers,

Selene

[donk]

You can fill in the blanks of what that will look like.

No one can [fill the blanks] that's the problem, we're in no-man's land.

I used to think we had to stop "them" from continuing to make **** up and kick the can down the road til it's too late...now I think it's too late. This stuff looked catastrophic in 2000, it's been stacked with miles of **** since them.

Now the same people who thought I was loon then are feeling like I did. All I can do is try to share what I learned, maybe now that people are interested we can figure out something to do about it?

[conk]

I really like a visual. This one is good: http://demonocracy.info/infographics..._exposure.html