The ‘notional value’ is meaningless. You have to look at the contract and see what the value at risk is.
Typically, derivatives contracts sold by banks to corporate customers are quite favorable to the bank, and unfavorable to the customer. On an interest-rate swap on a notional principal of $100 million, the customer might have to pay the bank $200,000 a month as long as the average 10-year Treasury is below 3%, and only be entitled to receive $150,000 a month if it goes above 3%. If the contract is for two years, the bank is highly likely to make money on the deal. In any case, the most they could lose on $100 million notional principal is $3.6 million, and that only if interest rates jump the week after the contract is signed. They are hedged even against this unlikely event.
>>look at the contract and see what the value at risk is.
LOL.
Who’s analyzing that?
Well said. A derivative is a contract.
I tell mom I will bring home some milk, and a pizza for my brother. Did I just increase the debt or money supply? Nope. And these agreements are not mutually exclusive.
I may renege, buy more or buy less.
Mom may promise Dad some milk, who promises a work buddy some milk. They created nothing new but promised trades.
Fraud is the problem though, when banks fractionally reserve their contracts and promise the same milk to multiple people. They should be hung.
Republicans, are you listening?
The value at risk is meaningless also ,, you’ll have a cascade effect where nothing does clear or can clear .. it’s all just an accounting gimmick to hedge and bolster reserves by making unsafe assets appear stable enough to be counted as reserves.