Quote:
Originally Posted by Ian Robinson
Damb right derivatives should be regulated , a lot the financial problems in the USA, UK, and elsewhere last year that led to melt down were due to greed and unregulated speculation in the markets.
IMO , derivatives should be outlawed.
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Err. No. They should not!
They should be regulated no more than they are, but regulators should pay far more attention to the financial solvency of the holders.
Derivatives have been around since Babylonian times. They are an essential part of any economy, Capitalist, Socialist, even Communist.
Derivatives, as pointed out,
derive their value from an underlying asset (currencies, mortgages, oil, greasy wool, grain, gold contract etc etc), anything for which their is a major market).
The two most common types of derivative are:
Futures - a legally binding contract to buy or sell an asset at a price mutually agreed. For instance anyone who's bought $10000 worth of gear in the last 18 months could have instead bought a future in US$ agreeing to buy them now at say 89 cents, when they were at 78 cents. You'd be ahead.
Of course it could have gone the other way and you'd be stuck. Your exposure is the difference either way.
If you'd bet on the AU$ to fall and bought a contract to sell, you would have been "short selling". Boo. Hiss, I hear. Wrong! Wrong! Wrong! Tell you why in a minute.
The second most common type is called an 'Option'
An option is just that. You purchase the
right to purchse an asset at a certain time for a certain price.
The main difference is that an option is not a contract, you have no exposure beyond the price you originally paid.
Financial derivatives (swaps, exchanges eyc) are VERY complex instruments, often tied up with the value of other derivatives.
This was one of the major problems of the GFC. Banks, seeking higher and higher returns opted to take positions on derivatives that were based on 'sub-prime' mortgages.
But this was not THE cause. Many other factors came into play years before the GFC. A declining US "real" economy, that was largely hidden by all the speculation on Wall Street was the principal cause.
Greed and ignorance were pretty high up there as well. And I don't just blame the Banks.
Mom & Pop have no business in financial markets. If you haven't got time to monitor your investments or broker, or the markets in general, you should just shove it in the bank or buy a decent rental property. Stay away from the market unless you are prepared to lose. Its just like horse racing. A lot of negative publicity and venom has been directed at hedge funds.
But these were the people everyone SHOULD have been listening to!
Their portfolios made up largely of "shorts" should have set the alarm bells wringing months before the crash. A quick look would have shown the negative opnion these massive funds had of the Financial sector. They are a massively important corrective indicator, before any "corrections" actually happen. The more 'shorts' you see in the market, the more you should pay attention!
But herd behaviour on the part of investors, corporate and retail, meant that more and more cash went into buying derivatives that, had anyone taken a good look, would have been seen as worthless. Nobody believed the bubble would burst. Despite historical evidence to the contrary.
To summarise: just about everything we take for granted is coverned by commodities exchanges. When BHP sells X dollars worth of Iron ore to China, it will likely take out an long option on US$, in case the price falls. China will do the reverse.
When we sell our products o'seas or buy from abroad in any quantity we do the same thing.
As I said these are just the two basic types of derivatives, They can become very, very complicated - to the point were the broker and traders don't really know how they work, they've just benn given a set of parameters under which to trade.
So: Yes derivatives should be regulated, but certainly not banned. At the end of the day, Caveat Emptor, must apply.
My .02$ which I'll trade you for .03euros for Jan 31/10 delivery.
PJH
............sorry kids, you lose.
