Derivatives 101: All you really need to know in plain English

[marmar]

via AlterNet:



Posted by devonawalker at 12:10 pm
April 22, 2010 1

Derivatives 101: All you really need to know in plain English


A lot is being said about the derivative market: How to regulate it? Why not ban it entirely? Regulate only over-the-counter derivatives?Well, here’s a little basic information.

Derivatives are basically insurance policies. Let’s say a farmer wants to lock in the price of grain at the beginning of the year so that he’ll save money in the long run if the price of grain does go up. The derivative would be the insurance purchased on that transaction. The farmer might want to purchase this insurance, betting that he’s right. But the growth in the derivative market comes from the opportunity for anyone to purchase insurance on that same transaction.

A derivative gets its name because its value is derived from something else, typically another contract, or deal. It’s entirely unregulated and has a market of about 20 times the size of the American economy.

Financial reform proposals seek to regulate this market by bringing it out into the open.

“A healthy financial future requires that we bring comprehensive reform to the over-the-counter derivatives markets. It is critically important that we bring transparency to this market and address the significant information advantage enjoyed by Wall Street,” Gary Gensler, the chairman of the Commodity Futures Trading Commission said. .........(more)

The complete piece is at: http://blogs.alternet.org/speakeasy/2010/04/22/derivatives-101-all-you-really-need-to-know-in-plain-english/

[SpiralHawk]

1. "We like keeping this crap occult." - Republicon occultists

"So we can work our shit. sneer."

- Republicon occultists

[DJ13]

2. has a market of about 20 times the size of the American economy.

Naked shorting (shorting shares of stocks beyond the number of shares outstanding) is illegal, it should be the same with derivatives.

Its absurd that these investment brokers can trade 100x (or more) the number of derivatives than the actual physical commodity it supposedly represents.

We need to limit derivatives contracts to a 1:1 (or 1.5 at most) ratio.

[Ruby the Liberal]

3. I would be happy just having sunlight on counter-parties

and exchange visible quotes.

Right now, people have no clue who is betting against them (to fail) and what those people may know or could do.