Will Derivatives Wipe Out Some Currencies? | ||||
|
Over the last several years, there has been a lot of discussion about the size of the derivatives market, and how much it has grown since 1990. That market was around $20 trillion in size in ‘90, and now is estimated by the BIS to exceed $600 trillion world wide.
Given that amount is 10 or 12 times the entire world GDP of roughly $50 trillion a year, this amount of derivatives is just astounding. The fact is that world currencies are threatened if these go sour. We will get into this in a moment. First, let us discuss some derivative basics.
Derivatives proponents (brokers and bankers) have previously stated that the actual value of derivatives is a fraction of the actual total size, and that all the worry is overblown. The total size is called the ‘notional amount’. For example, if we decided to make a contract on the price of gold for 100 ounces, (a private futures contract between us) the notional amount would be 100 times the price of gold. If the price of gold rose $1, the value of that contract would be $100, but the notional amount is $68,000 (680*100). Derivatives proponents state the cry about the incredible notional amounts is over done, and try to get us to focus on the smaller ‘value’ amounts and not to worry.
Oh yes, we should worry!
*snip* For more, read HERE.
No comments:
Post a Comment