If you have a trillion dollar of derivatives, and their value
goes down to zero, will anyone notice?
Yeah, the loser goes bankrupt, the winner does not get the
cash. You are absolutely right, the zoo of derivatives is
huge, and some are more beastly than others. They are all
pretty leveraged instruments, though.
The key to risk management of such a huge exposure
is "netting" - banks buy some, sell some
of equivalent stuff, so net-net their exposure to risk is zero.
However... when their counterparties fail (hedge
funds or other big risk takers), their net-net position is
going bad. First, they lose the cash from the failed
counterparty. Second, they have a position that netted that
position, and that position loses even more. |
