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Author: NajdorfSicilian Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 506154  
Subject: Re: Derivatives rules -- loose as usual Date: 5/16/2013 9:26 PM
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Oh god.

Because it was IR derivatives and FX swaps that made the banks lose money. Sure it was. Not the fact that Citi, BofA, Bear, Lehman were levered 32x to the RE market and mortgages...which is how pretty much every US bank in history has gone bust, ever.

IR swaps are 75% of the entire market. About 90% of these trades are pure fixed-to-floating swaps. Virtually all of these are hedged, the market maker just clips their 2-5 bps to sit in the middle.

FX is about 10%. Around 85% of fx derivatives are simple forward exchanges, or swaps. Vivendi gives Disney Euros for a year, and Disney gives Vivendi dollars for a year [or 3] at a rate agreed upon today. At the end of the term, they swap back. That's it.

CDS, commodity, and equity-linked very are tiny percentages, low single-digits.

Derivatives were invented approximately 3,000 years ago to hedge risk. They have yet to break a financial system.

Notional is a useless number, to wit: JPM agrees to swap a fixed 2% payment for 10 years to GS and receive Libor of $700 Tn notional. The next day they do opposite swap with GS. They just added $1400 Trillion of derivative contracts into the system. But no additional risk of any sort.

Notional is just a number the know-nothings in the media use to scare the ignorant, the rubes, and the witless in order to sell papers.

Source: all data BIS.
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