Over The Counter Derivatives What Are They?
So how big is the Derivatives Market Most people who follow the derivatives say that the amount can be as high as one quadrillion? Let us take a look at what derivatives are, these are acutely just bets. On underlying Securities or Commodities to try to insure the value of their products. But today these are No different than a financial Casino.
A Small Cash Amount Controls Much With Risk
With financial derivatives you just put a small percent down to control a much larger amount of paper. With a derivative of the notional price for that derivative moves in a direction away from the position that you took then you need to come up with money to cover, this is called a Margin Call.
What the Futures Markets were Created to do
Originally when derivatives were created, they were a kind of insurance mainly used by Farmers in order to protect their profits or the cost of growing their crops. The farmers could take a position contrary to the value of their crop. In other words, if the value of their crops was less than normal or expected, then the bet placed in the derivatives market was the opposite, so they could collect on that investment thus balancing out.
Its Out of Control Now!
But what has happened over the years since the inception of the Futures Markets is that many more players have gotten involved. You may be thinking so what? Well now days Banks and even Pension Funds have gotten into this game.
They have done this because as their normal investments like Bonds began to pay less they required more money to keep up with the payments that they needed for their pension beneficiaries. Today these banks bet on interest rate derivatives. Now can you begin to see the problem here? Derivatives are a way to achieve leverage and the banks should not be involved in risky products like those in the derivatives markets in my opinion.
Are Banks Gambling With Our Money?
Banks especially have the ability to rig these markets because they have virtually unlimited supply of money since in a Central Banking System, banks can go to the Federal Reserve Window and get Fiat money at let’s say 2 percent, and then take that money and place bets in these derivative markets. In other words they can use their power to manipulate these markets. And we already know what happens when manipulation takes place in these markets it will not end well.
Final Words
In my opinion what has been created is nothing more than a giant financial Casino. And we all know that in a casino you don’t always win. That is all I want to say at this time on this subject, but I recommend that you get better informed and look into this dilemma.
