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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: GraceZ who wrote (211713)12/29/2002 2:33:48 AM
From: smolejv@gmx.net  Read Replies (3) of 436258
 
The cato paper explains in a straightforward way what the swaps, forwards, futures, options (and so on) are. However, its main intent, according to its title ("10 Myths About Financial Derivatives") as well as its content, was to debunk these ten myths.

The paper is dated sept 1997. In view of LTCM - that crested march 98 and blew up oct 98 - at least the paragraphs on the first myth "Derivatives Are New, Complex, High-Tech Financial Products Created by Wall Street's Rocket Scientists" need a fresh layer of paint.

Also the text on the myth 3 "The Enormous Size of the Financial Derivatives Market Dwarfs Bank Capital, Thereby Making Derivatives Trading an Unsafe and Unsound Banking Practice":

"For the 10 largest derivatives players among U.S. bank holding companies, derivative credit exposure averages 15 percent of total assets. The average exposure is 49 percent of assets for those banks' loan portfolios. In other words, if those 10 banks lost 100 percent on their loans, the loss would be more than three times greater than it would be if they had to replace all of their derivative contracts."

...is rather out of date. The latest official number on notional amount is 50+ trillion, up substantially from about 20 in 1997. Dealing in risk seems still to be the one game in town. See

occ.treas.gov
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