Posted on 10/22/2011 9:43:11 AM PDT by rabscuttle385
If your point was the notional ($2 billion value of the assets underlying my bet) has little to do with the actual money I risked, $10, then you're welcome.
If your point was that I was in danger of losing the notional value, then you're still confused.
Just as you were confused about the possibility that taxpayers are on the hook for $55 trillion in possible losses based on the notional (not real or actual, see definition #4) value of the derivatives in question.
Let me know if there's anything else I can explain to you to reduce your confusion.
Always glad to help.
Aside from the counter-logic of betting upon Chicago Bears victories as an economics prosperity means; do the Chicago Outfit’s bookies accept derivatives in lieu of cash?
Why would they? Notional value has nothing to do with cash risk.
Slightly off course, but I understand your thought process
The example I posted was simply one possible scenario. It is impossible to quantify the true exposure on these trillions of outstanding notional amounts in existing derivatives without seeing the balance sheets and the actual details of the trades themselves.
In the example I cited previously, Bank "A" paid a fixed interest rate while receiving a floating interest rate on one swap with a notional of $100million. We saw that the net payment in my example was only $25,000. In the real world, Bank "A" would go out into the market and trade another Interest Rate Swap with another counterparty in which Bank "A" will receive a fixed interest rate in exchange for paying a floating interest rate on another Swap with a $100million notional. So Bank "A" pays a fixed rate and receives a floating rate from Bank "B", while simultaneously receiving fixed and paying floating to Bank "C". Bank "A" is essentially hedged with almost no exposure (aside from the possibility of Banks A or B going under which can also be hedged), but the outstanding notional amount of derivatives for Bank "A" is reported as $200 million.
The general public, and even those with some understanding of financial markets see these figures and come away with a completely inaccurate perception of what they actually mean in terms of potential financial impact, which is understandable. The writers of these articles are clearly exploiting that.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.