Global Credit Derivatives Market = x10 Global GDP.

[The once and future king]

Global Derivatives Market = x10 Global GDP.

Every now and again you stumble on a piece of information that blows your mind. There is about 450 Trillion dollars in traded risk (derived from credit)which is greater than the global housing market and if you sold every company on the planet it wouldnt raise that much capital.

Warren Buffet once described derivatives as 'Weapons of Mass Financial Destruction'. And he is right. They do not disperse risk. They magnify it.

Sorry, if this is a bit sparse, I am still digesting this my self but felt compelled to put it out there.

[Zygote]

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if you sold every company on the planet it wouldnt raise that much capital.

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to who?

[GoodCallYouWin]

"to who?"

The intergalatic monetary fund.

[The once and future king]

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if you sold every company on the planet it wouldnt raise that much capital.

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to who?

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A forum nit?

You realize that this is the mechanism by which the vast majority of "paper" money enters the economy. This is a market of debt.

[Zygote]

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if you sold every company on the planet it wouldnt raise that much capital.

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to who?

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A forum nit?

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your global gdp stat is bunk and void of logic or relevance to our world. Whether you want consider that relevant or not is your choice.

[The once and future king]

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your global gdp stat is bunk and void of logic or relevance to our world. Whether you want consider that relevant or not is your choice.

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Im only using it to illustrate a point you nit. Trying to put the sum of 450 trillion dollars into perspective.

[mosdef]

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your global gdp stat is bunk and void of logic or relevance to our world. Whether you want consider that relevant or not is your choice.

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Im only using it to illustrate a point you nit. Trying to put the sum of 450 trillion dollars into perspective.

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Yes, but I think there's a lot of "double counting" in the derivatives market. For one thing, if two people participate in, say, an interest rate swap then they are both at risk of interest rates moving in an unfavourable direction, but there is no risk that they both get dinged with bad interest rate movements. Also, if someone sells an interest rate swap and then later decides to hedge by taking the opposite position, that person could conceivabley be on both ends of a cancelling transaction where -1+1=0, but -1+1=2 in "magnitude of derivatives market".

[bobman0330]

I think you're probably confusing the notional value of existing derivatives with the actual risk involved. With an option or an interest-rate swap or pretty much any other kind of common derivative, the notional value is going to be much bigger than the economic value or the actual payments involved.

Also, a lot of derivatives only transfer existing risk from one person to another, they don't actually create it. Not sure how much of the market that represents these days though.

[ConstantineX]

[ QUOTE ]
Global Derivatives Market = x10 Global GDP.

Every now and again you stumble on a piece of information that blows your mind. There is about 450 Trillion dollars in traded risk (derived from credit)which is greater than the global housing market and if you sold every company on the planet it wouldnt raise that much capital.

Warren Buffet once described derivatives as 'Weapons of Mass Financial Destruction'. And he is right. They do not disperse risk. They magnify it.

Sorry, if this is a bit sparse, I am still digesting this my self but felt compelled to put it out there.

[/ QUOTE ]

Imagine you take out a loan from a bank, at some interest rate r. You have x in current assets. You owe (1+r)x in liabilities. Clearly this loan will only be given to you if Commercial Bank A thinks you can transform x in current assets to greater than (1+r)x in future assets. Summing over the USA, we should expect that the value of just say one-year loans (which capital markets facilitate the liquidity of) to be greater than the GDP, no?

Now, given that example, why does that statistic you quoted worry you? Clearly, derivatives, like almost every other man-made financial contract, have to do with evaluating the present value of future cash flows. This magnification of the worth of current assets is leverage, closely related in economic terms to the time value of money.

Leverage can allow speculators to gain much more than simply buying the underlying, yes. But conversely, the sellers of those derivatives can reduce the risk they face from changes in the underlying, as well. Businesses and individuals of all stripes can then relegate themselves to minimizing the risk of assets that temporarily pass through their hands or are too macroscopic for them to control. McDonald's, for example, has no business speculating on the price of potatoes;we can see that every business through the prudent use of derivatives should be able to more easily focus on their core competencies. The same mechanism that allows the speculator to magnify his bets allows the hedger to minimize his risks.

P.S: By the way, I'm not saying there is no danger in being over-levered. We'll see some hedge funds prove that in the near future. But bad statistics designed to engender fear are no way to understand the dangers present in our financial markets.

[The DaveR]

There is a ton of double counting. For example, there are a huge number of closed positions that are actually matched trades so that number is hugely inflated.

Buffett is totally wrong here.