Thursday, September 20, 2007

Derivatives Better Explained

Hat tip to commenter Rohit for bringing a great MSN Money article to my attention and its exploration of the heart of the matter for volatile markets: an flight away from highly leverage derivatives.

The article makes a minor error at the start by wondering if we're headed for an "epic bear market". While we should be concerned about a bear market outlook, the article's real umph comes from the source it uses and a pretty complete exploration of over-the-counter derivatives market. Any how, derivatives unwinding will impact far more than the stock stock market.

So look beyond the bear stock market theme at the start of the article and concentrate on the derivatives aspect of the piece.

To read more click here.

I'd also suggest reading the "talk back" section of the article where readers get to comment. Most have no idea of big this problem is. One commenter thought a $300 bln S&L style bailout would solve the problem. The article didn't disclose that the notional value of the derivatives involved amounts to around $25 TRILLION dollars.

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