If I know anything at all about finance, it must mean EVERYONE knows all about it. Because I lag when it comes to numbers (and apparently fashion). I remember something about derivatives in calculus, which I took twice: the first time I dropped out halfway through because I was sure that if I took it again, I'd get score 80% on the credit, when I was sitting at a grade of 72%. The second time I took it, I gave up halfway through, because I'd already gotten into the university of my choice, and couldn't be bothered to dedicate my brain to a subject I would never touch again. That is until, now... 15 years later.
I should've worked harder, and I should've suffered through first-year calculus at University along with many suffering friends, even though it would've brought my already weak GPA down further. (If I ever have kids, I'll tell them about having avoided that suffering, and how I shouldn't have.) Derivatives are important. They are the intersection between philosophy and math, and they've been used to make stupid amounts of money, enough money to save the world a few times, more money than there is. A derivative is a contract to buy something at a certain price in the future, no money down. I don't know if it has anything to do with grad 13 calculus. And I might be wrong on that. All I know is that it is a very tiny piece of a very large puzzle, and the only way I learn anything is by writing it down.
Apologies, if you learned nothing here.
Sunday 8 February 2009
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1 comment:
"A derivative is a contract to buy something at a certain price in the future, no money down."
It is a contract entered into by two parties. The amount each party owes or is entitled to collect is *derived* from the value of something else that neither party necessarily owns.
If you bought a call option, for example, you have to pay an amount (called a premium) for the right to buy that stock at a given price (called a strike price). It is not, therefore, a case of "no money down" as you put it.
The derivatives in the news are not necessarily the standardized, exchange-traded contracts like puts, calls, and future. They are over-the-counter (OTC) products traded between banks. "I'll hand you $100.00 today. If AIG is still in business a month from now, you keep it. If they fold, you pay me $1000.00." This is a made-up example, but the idea is reasonably close. Neither you nor I need own any AIG stock or have any other interest in the firm. We're just entering into an agreement.
I'm a lay person, but I'm willing to offer this explanation as reasonable. Thanks!
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