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Non-Tech : Derivatives: Darth Vader's Revenge
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To: accountclosed who wrote (833)3/25/1999 11:00:00 AM
From: Henry Volquardsen  Read Replies (1) of 2794
 
it's tough to get a good measure on the actual speculative portion of a bank's derivative portfolio from published data. However internal management can get a better feel using value at risk analysis. This is still very much a theoretical tool so there will be a lot of debate over its value. But, as you say, a large portion of a bank's derivative portfolio is matched off and fairly straight forward stuff. The real question becomes not what is the price risk on the portfolio but what is the credit exposure.

Regarding traders contracts, most banks I am aware of have open ended contracts for market makers and not defined duration contracts. One year contracts are more common with proprietary traders. As far as the traders comments I think they are being a bit disingenuous in saying the capital access is not a major issue. It is a major inducement for working at a bank and more than offsets the cost of filling customer business. I think they are overstating their case :)
The information flow, however, is a very important inducement. I have seen hundreds of traders who are great traders when they are sitting in the middle of a major dealing room. Often their egos get the best of them and they start to believe their own bonuses. When they go independant they find out that it is much tougher to trade without the info flow. Most of them blow up.
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