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

To: Stitch who wrote (258)	9/29/1998 8:12:00 AM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 2794

Stitch, I think there are two dangers in derivatives as a class. The one most people had focused on in recent years was the increasing complexity of the new esoteric derivatives. Many firms started dealing in these as the margins collapsed in more traditional products and they looked for new areas where they could still charge for 'value added'. The problem that people focus on with these is that it is difficult, at times, to get a clear picture of what the risk is to various price movements. The more mundane danger is the one you highlight. Technically The derivative doesn't far exceed the underlying asset, that is usually pretty straight forward. The problem gets back to the issue of leverage. I look at this in terms of capital, how much capital does a bank require to support a certain amount of derivatives exposure. One of the things I said early on is that the banks appear to have competed with each other for business with some firms by offering more lenient credit terms. This allows the amount of derivatives, or any other exposure for that matter, in relationship to the capital supporting that risk to become excessive. Henry