Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : All Clowns Must Be Destroyed -- Ignore unavailable to you. Want to Upgrade?

To: pater tenebrarum who wrote (34912)	5/23/2000 7:43:00 PM
From: Lymond	Read Replies (4) \| Respond to of 42523

re: aren't they all speculators, and the ultimate risk takers in rate hedges etc? Around these parts, we prefer to be referred to as the ultimate risk managers <vbg>. You touch of course on one of the great imponderable issues of our day. Derivatives still receive a bad rap overall -- unfairly IMO. But the sizes involved, and the increasing complexity of many instruments away from plain vanilla swaps, for example, and the interlocking nature of the exposures (chiefly distributed among 100 or so players worldwide) beg the obvious question as to how well the system could absorb a 10+ sigma shock. 1998 was educational -- and encouraging IMO -- in this regard, and clearly resulted in some big VaR modelling adjustments. Yet this undoubtedly was not the ultimate test, and therefore vigilance remains warranted. I think the odds of a systemic worldwide financial crash brought about by derivatives problems remains extremely low. 1998 did have one positive effect in that it started the chain of events that took a lot of leverage out of the system via reduced hedge fund activity. But there's no question that these instruments can add fuel to the fire, so to speak, during severe market dislocations. The bigger question in my mind is documentation risk, as derivatives do not settle like ordinary cash instruments (i.e, there is tail risk, ala insurance agreements). If this is mishandled, some institutions could obviously falter. But I nevertheless believe, barring an Armageddon scenario, that derivatives per se are unlikely to cause undue stress to the global financial system. The overriding issue for financial institutions is, as always, credit risk, which incorporates derivatives exposure but naturally encompasses a whole lot more, namely the much larger non-financial sector.