Skip to comments.Understanding Derivatives
Posted on 05/29/2011 4:29:09 PM PDT by bigbob
Heidi is the proprietor of a bar in Buffalo.
She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.
To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later.
Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).
Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Buffalo.
By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.
Consequently, Heidi's gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit.
He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral!!!
At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINK BONDS.
These "securities" then are bundled and traded on international securities markets.
Naive investors don't really understand that the securities being sold to them as "AAA Secured Bonds" really are debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb! and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.
One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.
Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.
Snce Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and Heidi's 11 employees lose their jobs.
Overnight, DRINK BOND prices drop by 90%.
The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the BOND securities.
They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.
Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the Federal government.
The funds required for this bailout are obtained by new taxes levied on employed, middle-class, nondrinkers who have never been in Heidi's bar.
Now do you understand?
One of those things that would be funny if it weren't so true.
When b frank drinks, EVERYBODY drinks!
This has made the email rounds before but it’s worth the bump
I took two semesters of Calculus and never quite understood derivatives or integrals. This article shed no further light on the subject.
“Heidi is the proprietor of a bar in Buffalo.
She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. “
SO the next time one of reprobates staggered through her door, Heidi pulled her shotgun out from behind the bar, cycled the action and told the deadbeat “Get the f*** out of my bar”.
Heidi only had to actually shoot one, and word soon got around among the deadbeats stopped coming, and no more problems were had with any of them ever after.
Heidi’s remaining cash paying customers were so happy, they started bringing other cash paying customers with them, and everyone lived happily ever after.
I love happy endings.
And we know from the wisdom of so many freepers that Heidi, her suppliers, and her financiers are just victims utterly entitled to the loot they took away for years, and deserving that taxpayers should reimburse their every ultimate loss.
It’s those cunning unemployed alcholics what did it, make them pay!
Yeah, I understand a little bit. On the debt interest is charged so any payments made by the customers go toward interest.
But that interest is an income stream that can sold too and processing fees can be charged and contracted out and thus be an income source to someone.
And future income can be borrowed against today. Which means more fees.....Hmmmm... the bar needs to raise prices.
integral is the area between a function and the horizontal axis; or a function which, when you differentiate it, gives you your original function back ("anti-derivative")
"partial derivatives" mean going parallel to one particular axis, more or less.
Kinda gives Buffalo a bad rap, but it *is* a liberal enclave. Heidi had a Buffalo bar, but she barred all buffaloes from entry. Now the chips are down and the buffalo is empty.
yah...my wife used to do the books for a guy whose favorite saying was “We lose a nickel on every item, but we make it up in volume”....