Can someone explain derivatives?

[Omega Point]

What are they? How are derivatives different than the mortgage debt or are they the same? If different, what is the danger I keep hearing about them?

Thanks.

[jonnycsd]

In simple terms, a derrivative is a contract that binds one party to pay another based on measureable future outcomes. There are derrivatives based on stock prices, commodity prices, harvest levels, currency exhange rates, interest rates, and even weather events. They can get very complex, and you can even have derivatives based on derivatives, or combinations of derivatives.

[jonnycsd]

In simple terms, a derrivative is a contract that binds one party to pay another based on measureable future outcomes. There are derrivatives based on stock prices, commodity prices, harvest levels, currency exhange rates, interest rates, and even weather events. They can get very complex, and you can even have derivatives based on derivatives, or combinations of derivatives.

[jonnycsd]

In simple terms, a derrivative is a contract that binds one party to pay another based on measureable future outcomes. There are derrivatives based on stock prices, commodity prices, harvest levels, currency exhange rates, interest rates, and even weather events. They can get very complex, and you can even have derivatives based on derivatives, or combinations of derivatives.

[jonnycsd]

In simple terms, a derrivative is a contract that binds one party to pay another based on measureable future outcomes. There are derrivatives based on stock prices, commodity prices, harvest levels, currency exhange rates, interest rates, and even weather events. They can get very complex, and you can even have derivatives based on derivatives, or combinations of derivatives.

[jonnycsd]

In simple terms, a derrivative is a contract that binds one party to pay another based on measureable future outcomes. There are derrivatives based on stock prices, commodity prices, harvest levels, currency exhange rates, interest rates, and even weather events. They can get very complex, and you can even have derivatives based on derivatives, or combinations of derivatives.

[greekfire]

This video clip isn’t a direct answer to your question, but it is useful nonetheless.

http://www.youtube.com/watch?v=lQsC-F9YRxk

It is Ron Paul on CNN American Morning today talking about the financial cluster bomb that we are in. At about the 4:15 mark Ron Paul starts to talk about the pyramiding of derivatives and how Warren Buffet says that he stays away from them because they are so complex.

[greekfire]

This video clip isn’t a direct answer to your question, but it is useful nonetheless.

http://www.youtube.com/watch?v=lQsC-F9YRxk

It is Ron Paul on CNN American Morning today talking about the financial cluster bomb that we are in. At about the 4:15 mark Ron Paul starts to talk about the pyramiding of derivatives and how Warren Buffet says that he stays away from them because they are so complex.

[greekfire]

This video clip isn’t a direct answer to your question, but it is useful nonetheless.

http://www.youtube.com/watch?v=lQsC-F9YRxk

It is Ron Paul on CNN American Morning today talking about the financial cluster bomb that we are in. At about the 4:15 mark Ron Paul starts to talk about the pyramiding of derivatives and how Warren Buffet says that he stays away from them because they are so complex.

[greekfire]

This video clip isn’t a direct answer to your question, but it is useful nonetheless.

http://www.youtube.com/watch?v=lQsC-F9YRxk

It is Ron Paul on CNN American Morning today talking about the financial cluster bomb that we are in. At about the 4:15 mark Ron Paul starts to talk about the pyramiding of derivatives and how Warren Buffet says that he stays away from them because they are so complex.

[greekfire]

This video clip isn’t a direct answer to your question, but it is useful nonetheless.

http://www.youtube.com/watch?v=lQsC-F9YRxk

It is Ron Paul on CNN American Morning today talking about the financial cluster bomb that we are in. At about the 4:15 mark Ron Paul starts to talk about the pyramiding of derivatives and how Warren Buffet says that he stays away from them because they are so complex.

[jonnycsd]

To illustrate – suppose an orange grove owner is worried that an early freeze could ruin his crop. So he might buy weather derivatives that would pay money if the National Weather Service reports a temperature at one or more reporting locations at 29 degrees or lower. In that sense, they can operate a lot like insurance.

Now, suppose you are an investor (or bank) who sold a bunch of these derivative contracts in one geography, and you think – one year it is going to freeze over there and I am going to get hit. I will sell some of these contracts to others so we can share the costs if winter is cold. Maybe the guy selling derivatives in California swaps some contracts with the guy selling derivatives in Florida. Sounds sensible, right?

Now suppose Florida and Cali BOTH have a brutal early freeze, the oranges are wiped out and the derivative guys take losses on the entire portfolio, and say – “damn, we lost our shirts on that, we have to stop selling derrivatives to the lettuce growers, avocado growers and strawberry growers”. And because they appear to be in big, big trouble no other derivatives traders want to be on the other side of any agreements with them – who knows if they can pay or not?? Meanwhile, without some guarantee, the lettuce, strawberry, and avocado growers cant get loans to hire people to plant and operate thier business and the entire thing comes crashing down.

That, in simple terms, is what is happening with the mortgage market and financial institutions now. Derivatives are like matches – essential tools for a modern economy, but you gotta use them responsibly and keep the away from the children.

[jonnycsd]

To illustrate – suppose an orange grove owner is worried that an early freeze could ruin his crop. So he might buy weather derivatives that would pay money if the National Weather Service reports a temperature at one or more reporting locations at 29 degrees or lower. In that sense, they can operate a lot like insurance.

Now, suppose you are an investor (or bank) who sold a bunch of these derivative contracts in one geography, and you think – one year it is going to freeze over there and I am going to get hit. I will sell some of these contracts to others so we can share the costs if winter is cold. Maybe the guy selling derivatives in California swaps some contracts with the guy selling derivatives in Florida. Sounds sensible, right?

Now suppose Florida and Cali BOTH have a brutal early freeze, the oranges are wiped out and the derivative guys take losses on the entire portfolio, and say – “damn, we lost our shirts on that, we have to stop selling derrivatives to the lettuce growers, avocado growers and strawberry growers”. And because they appear to be in big, big trouble no other derivatives traders want to be on the other side of any agreements with them – who knows if they can pay or not?? Meanwhile, without some guarantee, the lettuce, strawberry, and avocado growers cant get loans to hire people to plant and operate thier business and the entire thing comes crashing down.

That, in simple terms, is what is happening with the mortgage market and financial institutions now. Derivatives are like matches – essential tools for a modern economy, but you gotta use them responsibly and keep the away from the children.

[jonnycsd]

To illustrate – suppose an orange grove owner is worried that an early freeze could ruin his crop. So he might buy weather derivatives that would pay money if the National Weather Service reports a temperature at one or more reporting locations at 29 degrees or lower. In that sense, they can operate a lot like insurance.

Now, suppose you are an investor (or bank) who sold a bunch of these derivative contracts in one geography, and you think – one year it is going to freeze over there and I am going to get hit. I will sell some of these contracts to others so we can share the costs if winter is cold. Maybe the guy selling derivatives in California swaps some contracts with the guy selling derivatives in Florida. Sounds sensible, right?

Now suppose Florida and Cali BOTH have a brutal early freeze, the oranges are wiped out and the derivative guys take losses on the entire portfolio, and say – “damn, we lost our shirts on that, we have to stop selling derrivatives to the lettuce growers, avocado growers and strawberry growers”. And because they appear to be in big, big trouble no other derivatives traders want to be on the other side of any agreements with them – who knows if they can pay or not?? Meanwhile, without some guarantee, the lettuce, strawberry, and avocado growers cant get loans to hire people to plant and operate thier business and the entire thing comes crashing down.

That, in simple terms, is what is happening with the mortgage market and financial institutions now. Derivatives are like matches – essential tools for a modern economy, but you gotta use them responsibly and keep the away from the children.

[jonnycsd]

To illustrate – suppose an orange grove owner is worried that an early freeze could ruin his crop. So he might buy weather derivatives that would pay money if the National Weather Service reports a temperature at one or more reporting locations at 29 degrees or lower. In that sense, they can operate a lot like insurance.

Now, suppose you are an investor (or bank) who sold a bunch of these derivative contracts in one geography, and you think – one year it is going to freeze over there and I am going to get hit. I will sell some of these contracts to others so we can share the costs if winter is cold. Maybe the guy selling derivatives in California swaps some contracts with the guy selling derivatives in Florida. Sounds sensible, right?

Now suppose Florida and Cali BOTH have a brutal early freeze, the oranges are wiped out and the derivative guys take losses on the entire portfolio, and say – “damn, we lost our shirts on that, we have to stop selling derrivatives to the lettuce growers, avocado growers and strawberry growers”. And because they appear to be in big, big trouble no other derivatives traders want to be on the other side of any agreements with them – who knows if they can pay or not?? Meanwhile, without some guarantee, the lettuce, strawberry, and avocado growers cant get loans to hire people to plant and operate thier business and the entire thing comes crashing down.

That, in simple terms, is what is happening with the mortgage market and financial institutions now. Derivatives are like matches – essential tools for a modern economy, but you gotta use them responsibly and keep the away from the children.

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