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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: see clearly now who wrote (971)	10/23/1999 12:04:00 PM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 2794

if I may butt in with my .02 my opinion is that there is no question that derivatives are good for the world (anyone surprised? -g-) As you point out it has greatly facilitated an increase of liquidity but even more importantly it allows for risk transference which can greatly reduce the amount of risk in an individual project. In my years in the industry I have been directly involved in structuring packages for large scale industrial and infrastructure projects that would never have gotten done if derivatives had not allowed for the transference of currency, interest rate and/or commodity risk. Instead of being a wild card for the project this risk gets transfered to an entity that can more efficiently manage the risk. Yes there are hiccups along the way as risk management evolves to handle such concetrated risk but the market gains more expertise every year. As to your other questions: Questions which remain are how much of the transactions are skimmed of as transaction costs? initially a lot but as time passes new participants join the market and competition starts to wring the excess transaction cost out of the market. When dollar interest rate swaps first started trading swap spreads were as wide as 5-10 b.p. Now the bid offer spread has contracted to the point where the interbank market routinely quotes spreads of a fraction of a basis point. This tightening of spreads occurs in all derivative markets as they develop. How much of this liquidity is/was going to destructive human behavior..to support the Milosevich's of our World, etc? very little I suspect. The money that winds up in such hands usually gets there the old fashioned way, loans and foreign aid. Henry