Options are the Biggest market: There is $1.2 quadrillion invested in derivatives alone.
- Thread starter lawrence-lugar
- Start date
Yes. The thing is, I do get something out of what almost everyone posts. But its the unintended message behind, usually. I learn a lot about people's psychology.
it's the nature of the market - it always crashes eventually, doesn't it?
marc
Just when?
Perhaps nobody on earth would know any Estimated figure by guessing, no matter how close or how far, I would think. However, no another source could dispute, either!
Exchange-traded, OTC, structured products from individual banks, CFD, SWAPS, hedge contracts, etc.
Just 2 cents!
Q http://www.bloomberg.com/news/artic...market-suffers-biggest-disruption-since-april 22 Aug 2013
Options volume has surged more than fivefold in the last decade to 16.7 million contracts a day last year as demand for securities that protect against losses and speculate on the direction of stocks grew, according to data compiled by the Chicago-based Options Clearing Corp.
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An example as to why the derivatives market is so large and why it isn't so scary:
99% of all derivatives are swaps. They are very low risk to the notional size and constantly marked to market. An example below:
Two banks: Goldman and JPM trade a swap against each other. Now they want to unwind the risk. Typical convention is to open a new swap with each other rather than ripping up the old one. In this case: 2x the notional is traded and no net risk. Even counteryparty risk is negligible as the firms will have a Credit Service Agreement in place which will net all the derivatives they have with eachother and require them to settle up MTM to within 1-5MM USD each day on the aggregate position.
When Lehman went under they probably had hundreds of billions if not trillions of notional of swaps on the books - yet no counterparty really lost any money as a result.
99% of all derivatives are swaps. They are very low risk to the notional size and constantly marked to market. An example below:
Two banks: Goldman and JPM trade a swap against each other. Now they want to unwind the risk. Typical convention is to open a new swap with each other rather than ripping up the old one. In this case: 2x the notional is traded and no net risk. Even counteryparty risk is negligible as the firms will have a Credit Service Agreement in place which will net all the derivatives they have with eachother and require them to settle up MTM to within 1-5MM USD each day on the aggregate position.
When Lehman went under they probably had hundreds of billions if not trillions of notional of swaps on the books - yet no counterparty really lost any money as a result.
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What are the risks involved with swaps? By Investopedia
http://www.investopedia.com/ask/answers/042415/what-are-risks-involved-swaps.asp
The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty risk. An interest rate swap is an agreement between two parties to exchange cash flows at a future specific time. Swap agreements involve two legs: the fixed leg and the variable leg. The holder of the fixed leg of the swap makes payments based on a fixed interest rate level. The holder of the variable leg makes payments on a variable interest rate, usually determined by an interest rate index such as LIBOR.
Interest rate risk is significant because interest rates do not always move as expected. Both parties have interest rate risk. The holder of the fixed leg risks the floating interest rate going higher, thereby losing interest that it would have otherwise received. The holder of the variable leg risks interest rates going lower, which results in a loss of cash flow since the fixed leg holder still has to make the streams of payments to the counterparty.
The other main risk associated with swaps is counterparty risk. This is the risk that the counterparty to a swap will default and be unable to meet its obligations under the terms of the swap agreement. If the holder of the variable leg is unable to make payments under the swap agreement, the holder of the fixed leg has credit exposure to changes in the interest rate agreement. This is the risk the holder of the fixed leg was seeking to avoid.
Counterparty default for swaps was a driver of the global financial crisis in 2008. The U.S. government has attempted to bring transparency and reduce systematic risk for swaps trading with the passage of the Dodd-Frank Act. Dodd-Frank requires most swaps to trade on swap execution facilities as opposed to over the counter, and it also requires the public dissemination of information for swap trading. This new market structure will help prevent a ripple effect impacting the larger economy in case of a counterparty default.
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https://en.wikipedia.org/wiki/Swap_(finance)
Q Dodd-Frank Act
http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm
“The Wall Street reform bill will – for the first time – bring comprehensive regulation to the swaps marketplace. Swap dealers will be subject to robust oversight. Standardized derivatives will be required to trade on open platforms and be submitted for clearing to central counterparties. The Commission looks forward to implementing the Dodd-Frank bill to lower risk, promote transparency and protect the American public.”
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What are the risks involved with swaps? By Investopedia
http://www.investopedia.com/ask/answers/042415/what-are-risks-involved-swaps.asp
The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty risk. An interest rate swap is an agreement between two parties to exchange cash flows at a future specific time. Swap agreements involve two legs: the fixed leg and the variable leg. The holder of the fixed leg of the swap makes payments based on a fixed interest rate level. The holder of the variable leg makes payments on a variable interest rate, usually determined by an interest rate index such as LIBOR.
Interest rate risk is significant because interest rates do not always move as expected. Both parties have interest rate risk. The holder of the fixed leg risks the floating interest rate going higher, thereby losing interest that it would have otherwise received. The holder of the variable leg risks interest rates going lower, which results in a loss of cash flow since the fixed leg holder still has to make the streams of payments to the counterparty.
The other main risk associated with swaps is counterparty risk. This is the risk that the counterparty to a swap will default and be unable to meet its obligations under the terms of the swap agreement. If the holder of the variable leg is unable to make payments under the swap agreement, the holder of the fixed leg has credit exposure to changes in the interest rate agreement. This is the risk the holder of the fixed leg was seeking to avoid.
Counterparty default for swaps was a driver of the global financial crisis in 2008. The U.S. government has attempted to bring transparency and reduce systematic risk for swaps trading with the passage of the Dodd-Frank Act. Dodd-Frank requires most swaps to trade on swap execution facilities as opposed to over the counter, and it also requires the public dissemination of information for swap trading. This new market structure will help prevent a ripple effect impacting the larger economy in case of a counterparty default.
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https://en.wikipedia.org/wiki/Swap_(finance)
Q Dodd-Frank Act
http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm
“The Wall Street reform bill will – for the first time – bring comprehensive regulation to the swaps marketplace. Swap dealers will be subject to robust oversight. Standardized derivatives will be required to trade on open platforms and be submitted for clearing to central counterparties. The Commission looks forward to implementing the Dodd-Frank bill to lower risk, promote transparency and protect the American public.”
UQ
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Q
When Delta went gambling on jet fuel
by Kate Kelly
@FortuneMagazine
June 2, 2014, 10:51 AM EST
http://fortune.com/2014/06/02/secret-club-kate-kelly/
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Q
Casino-like fuel hedges to hurt airlines in oil plunge
Date
December 5, 2014
http://www.smh.com.au/business/avia...t-airlines-in-oil-plunge-20141205-1213mt.html
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US airline fuel hedging Part 2: Alaska Air, JetBlue and Southwest try to crack the hedging code
15-Sep-2015
http://centreforaviation.com/analys...outhwest-try-to-crack-the-hedging-code-244043
Few airlines have shown they can crack the difficult hedging puzzle
The hedging strategies adopted by US airlines during the past year when fuel prices have decreased significantly vary widely, and show that no one airline has masterfully crafted a plan to avoid posting hedge losses or paying higher premiums for its hedging insurance.
Arguably, the huge savings that most airlines are enjoying in fuel outweigh the challenges in solving the hedging puzzle. Projections of fuel costs per barrel in the USD50 range for the next year are no doubt a welcome development for airlines worldwide.
But the challenge of managing a hedging programme in a volatile fuel environment is not something that most airlines have mastered, and attempting to craft effective hedges in 2016 and beyond may prove to be vexing.
UQ
When Delta went gambling on jet fuel
by Kate Kelly
@FortuneMagazine
June 2, 2014, 10:51 AM EST
http://fortune.com/2014/06/02/secret-club-kate-kelly/
UQ
Q
Casino-like fuel hedges to hurt airlines in oil plunge
Date
December 5, 2014
http://www.smh.com.au/business/avia...t-airlines-in-oil-plunge-20141205-1213mt.html
UQ
Q
US airline fuel hedging Part 2: Alaska Air, JetBlue and Southwest try to crack the hedging code
15-Sep-2015
http://centreforaviation.com/analys...outhwest-try-to-crack-the-hedging-code-244043
Few airlines have shown they can crack the difficult hedging puzzle
The hedging strategies adopted by US airlines during the past year when fuel prices have decreased significantly vary widely, and show that no one airline has masterfully crafted a plan to avoid posting hedge losses or paying higher premiums for its hedging insurance.
Arguably, the huge savings that most airlines are enjoying in fuel outweigh the challenges in solving the hedging puzzle. Projections of fuel costs per barrel in the USD50 range for the next year are no doubt a welcome development for airlines worldwide.
But the challenge of managing a hedging programme in a volatile fuel environment is not something that most airlines have mastered, and attempting to craft effective hedges in 2016 and beyond may prove to be vexing.
UQ
There are 10 trillion dollars in Eurodollar Futures notional open right now.
Notional in Fixed income is a meaningless number as the risk in fixed income derivatives is in the basis points (vs percentage points in equities and commodities).
Notional in Fixed income is a meaningless number as the risk in fixed income derivatives is in the basis points (vs percentage points in equities and commodities).
In typical swap agreements the swaps are marked to market constantly and cashflows are always being exchanged. They are not like a typical bond where there is a significant principal payment at the end which creates significant credit exposure. And like I said, most of the large counterparties have CSA's in place which net all their exposures with eachother as one trade. So you can't default on your debits while collecting on your credits.
The articles about the airlines hedging is a different animal. Airlines typically hedge 40% of their oil exposure. They do this so that they can reduce some volatility in their earnings. They know that if oil rises they can raise ticket prices somewhat (which is a natural hedge) and if oil falls ticket price declines will lag. Delta might have lost on hedges this time, but it means they have gained on 2.5x their hedging size. Headlines about derivatives hedging tend to forget the second leg of the trade or the reason why trades are done.
Q The Root Cause Of The 2008 Financial Meltdown: Derivatives
Submitted by IWB, on January 15th, 2011
http://investmentwatchblog.com/the-root-cause-of-the-2008-financial-meltdown-derivatives/
During the financial crisis in 2008, the root cause of the meltdown was derivatives. Specifically, CDOs, or Collateralized Debt Obligations related to mortgages and CDSs, or Credit Default Swaps. Derivatives encompass a wide range of financial products: futures contracts, interest rate swaps, options contracts, foreign exchange contracts (currencies), etc.
...
The table below shows the growth of derivatives since the 4th quarter 1999, as well as quarter-by-quarter since the beginning of 2007 to show how the banks have addressed the issue of exposure to derivatives since the most recent crash in 2008. Please take note “ the figures in the table below are the notional value of all derivatives in $Millions, so that first figure for commercial banks represents $234.654 TRILLION.
————Commercial Banks—–Holding Cos.
Q3 2010——$234,654,564——-$304,998,518
Q2 2010——$223,376,234——-$294,750,102
Q1 2010——$216,452,168——-$292,955,285
Q4 2009——$212,807,628——-$293,051,633
Q3 2009——$204,264,217——-$293,393,697
Q2 2009——$203,459,972——-$291,245,589
Q1 2009——$201,964,212——-$291,479,995
Q4 2008——$200,381,607——-$174,051,895
Q3 2008——$175,841,765——-$184,729,848
Q2 2008——$182,135,432——-$194,324,266
Q1 2008——$180,344,216——-$185,933,647
Q4 2007——$164,196,187——-$169,208,574
Q3 2007——$171,175,332——-$179,746,410
Q2 2007——$152,501,693——-$160,475,631
Q1 2007——$144,789,624——-$151,779,381
Q4 1999——-$34,816,789———$37,972,812
Since the repeal of Glass-Steagall in 1999, the total notional value of derivatives has grown by over 700% for holdings companies and 674% for commercial banks. Even more alarming, since the third quarter of 2008 when the cracks in the financial system were clearly evident, derivatives at the commercial banks have grown from $175 TRILLION to $234 TRILLION “ a $59 TRILLION increase. To put this in perspective, the cumulative Gross Domestic Product in the United States over that same time frame (Q3 2008 through Q3 2010) was approximately $32 TRILLION.
The tables below summarize the assets and derivatives holdings for the top five banks and the top five holding companies based on the most recent report issued by the OCC for the Third Quarter of 2010 (Figures in $Millions). The A/D ratio is the asset to derivatives ratio.
—————————————————-Assets————-Derivatives——–A/D Ratio
JP Morgan Chase Bank NA———-$1,642,691———$77,747,170———-2.1%
Citi National Assn————————$1,209,221———$51,410,415———2.4%
Bank of America NA———————$1,489,198———$50,467,838———3.0%
Goldman Sachs Bank USA—————-$96,105———$42,777,908———0.2%
HSBC USA National Assn—————-$189,731———-$3,872,488———-4.9%
Totals for Top 5—————————-$4,626,946——-$226,275,819———-2.0%
All Banks (1,105 Banks)—————$10,690,635——-$234,654,564———-4.6%
Excluding Top 5 (1,100 Banks———$6,063,689———-$8,378,745———72.4%
———————————————-Assets———–Derivatives——————-A/D Ratio
JP Morgan Chase & Co.————$2,141,595———–$78,660,494—————2.7%
Bank of America Corp.—————$2,341,160———–$72,310,369—————3.2%
CitiGroup, Inc.—————————$1,983,280———–$49,512,642—————4.0%
Goldman Sachs Group, Inc.———-$908,860———–$48,458,241—————1.9%
Morgan Stanley—————————-$841,372———–$41,830,849—————2.0%
Totals for Top—————————-$8,216,267———$290,772,595—————2.8%
Top 25 Holding Companies——-$13,668,715———$304,998,518—————4.5%
Excluding Top 5————————-$5,452,448———-$14,225,923————-38.3%
The top 5 banks currently hold 96% of all derivatives for the 1,105 Banks reporting. The top 5 holding companies have 95% of all derivatives.
... ...
The question is not will it happen again “ the question is WHEN it will happen?
I am 99% confident it WILL happen again – I am 99% confident that the scale of the collapse will be MUCH LARGER than the most recent collapse in 2008 “ and I am 99% confident we will be in FAR WORSE SHAPE to deal with the collapse in light of the massive amounts of debt that countries have accumulated during this most recent collapse.
UQ
Submitted by IWB, on January 15th, 2011
http://investmentwatchblog.com/the-root-cause-of-the-2008-financial-meltdown-derivatives/
During the financial crisis in 2008, the root cause of the meltdown was derivatives. Specifically, CDOs, or Collateralized Debt Obligations related to mortgages and CDSs, or Credit Default Swaps. Derivatives encompass a wide range of financial products: futures contracts, interest rate swaps, options contracts, foreign exchange contracts (currencies), etc.
...
The table below shows the growth of derivatives since the 4th quarter 1999, as well as quarter-by-quarter since the beginning of 2007 to show how the banks have addressed the issue of exposure to derivatives since the most recent crash in 2008. Please take note “ the figures in the table below are the notional value of all derivatives in $Millions, so that first figure for commercial banks represents $234.654 TRILLION.
————Commercial Banks—–Holding Cos.
Q3 2010——$234,654,564——-$304,998,518
Q2 2010——$223,376,234——-$294,750,102
Q1 2010——$216,452,168——-$292,955,285
Q4 2009——$212,807,628——-$293,051,633
Q3 2009——$204,264,217——-$293,393,697
Q2 2009——$203,459,972——-$291,245,589
Q1 2009——$201,964,212——-$291,479,995
Q4 2008——$200,381,607——-$174,051,895
Q3 2008——$175,841,765——-$184,729,848
Q2 2008——$182,135,432——-$194,324,266
Q1 2008——$180,344,216——-$185,933,647
Q4 2007——$164,196,187——-$169,208,574
Q3 2007——$171,175,332——-$179,746,410
Q2 2007——$152,501,693——-$160,475,631
Q1 2007——$144,789,624——-$151,779,381
Q4 1999——-$34,816,789———$37,972,812
Since the repeal of Glass-Steagall in 1999, the total notional value of derivatives has grown by over 700% for holdings companies and 674% for commercial banks. Even more alarming, since the third quarter of 2008 when the cracks in the financial system were clearly evident, derivatives at the commercial banks have grown from $175 TRILLION to $234 TRILLION “ a $59 TRILLION increase. To put this in perspective, the cumulative Gross Domestic Product in the United States over that same time frame (Q3 2008 through Q3 2010) was approximately $32 TRILLION.
The tables below summarize the assets and derivatives holdings for the top five banks and the top five holding companies based on the most recent report issued by the OCC for the Third Quarter of 2010 (Figures in $Millions). The A/D ratio is the asset to derivatives ratio.
—————————————————-Assets————-Derivatives——–A/D Ratio
JP Morgan Chase Bank NA———-$1,642,691———$77,747,170———-2.1%
Citi National Assn————————$1,209,221———$51,410,415———2.4%
Bank of America NA———————$1,489,198———$50,467,838———3.0%
Goldman Sachs Bank USA—————-$96,105———$42,777,908———0.2%
HSBC USA National Assn—————-$189,731———-$3,872,488———-4.9%
Totals for Top 5—————————-$4,626,946——-$226,275,819———-2.0%
All Banks (1,105 Banks)—————$10,690,635——-$234,654,564———-4.6%
Excluding Top 5 (1,100 Banks———$6,063,689———-$8,378,745———72.4%
———————————————-Assets———–Derivatives——————-A/D Ratio
JP Morgan Chase & Co.————$2,141,595———–$78,660,494—————2.7%
Bank of America Corp.—————$2,341,160———–$72,310,369—————3.2%
CitiGroup, Inc.—————————$1,983,280———–$49,512,642—————4.0%
Goldman Sachs Group, Inc.———-$908,860———–$48,458,241—————1.9%
Morgan Stanley—————————-$841,372———–$41,830,849—————2.0%
Totals for Top—————————-$8,216,267———$290,772,595—————2.8%
Top 25 Holding Companies——-$13,668,715———$304,998,518—————4.5%
Excluding Top 5————————-$5,452,448———-$14,225,923————-38.3%
The top 5 banks currently hold 96% of all derivatives for the 1,105 Banks reporting. The top 5 holding companies have 95% of all derivatives.
... ...
The question is not will it happen again “ the question is WHEN it will happen?
I am 99% confident it WILL happen again – I am 99% confident that the scale of the collapse will be MUCH LARGER than the most recent collapse in 2008 “ and I am 99% confident we will be in FAR WORSE SHAPE to deal with the collapse in light of the massive amounts of debt that countries have accumulated during this most recent collapse.
UQ
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