Thank you again for your writing to me on this subject. In your example of the $100 million notional value resulting in payment of $275,000. Now if that $100 million is $100 Billion the payment is arithmetic....that is to say $275,000,000....Yes,NO? If that $275,000,000 is payment for $100 billion then if the $100,000,000 was actually $10 trillion, then the payout would be raised by a factor of 100 or $27,500,000,000.....yes,NO??? Now if it was raised in this case to $44 trillion that number is approximately 4 times the $10 trillion dollar notional value or approximately $110,000,000,000....Yes/No???? I think I did the relational arithmatic correctly....and if that is how it works then the counterpart, in a worse case scenario would have to come up with about $110 billion dollars.....That would be a lot of money for JPMorgan or Bank of America to produce. That is the point I am trying to make should the system collapse. Am I misrepresenting the outfall of a worsecase situation or am I still off course?
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.