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Strategies & Market Trends : Zeev's Turnips - No Politics
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To: KyrosL who wrote (1940)10/28/2001 2:34:15 PM
From: Steve Lee  Read Replies (1) of 99280
 
Would the case of the seller defaulting assume that the exchange that backs the contract also defaults? Or does the exchange not back the liabilities of the seller?

If the long/put combo is as per your example, then the shareholder equity is $10,025 (the value of long stock plus the value of the puts). The notional value is $20,000 (value of long stock plus value of shares "controlled" by put options). This gives you a ratio of just under 2, so does not reflect the position that JPM is allegedly in.

My guess is that JPM is holding a combination of long and short puts and calls - along with other more complex derivatives - and as such if the market moves wildly in either direction, the profits on the winning positions can be expected to compensate for or even outweigh the losses. The worst case is likely a small move in the direction against which most of their bets are placed.

My problem with the essay referred by SOROS is that it does not explain (because the author does not know) the exact nature of the derivatives held, and therefore cannot come up with a specific scenario that would result in a calamity. So while a calamity is possible, the author does not prove it - but tries to scare us with large numbers that in themselves are meaningless.
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