March 27, 2007 9:09am CST
Are derivatives weapons of mass destruction ? I think they are not but they are dangerous in the hands of someone who doesn't realize what they really are and because lots of people who doesn't know what derivatives really are sometimes they 're accidents with it and it 'll always be. What do you think?
28 Mar 07
Swaps,CDF,Speeders, Options on stocks,gold or other are derivatives. A simple explanation what derivatives are isn't that simple. Options on stocks : there are two sorts call and put options. The buyer of a call option (exemple microsoft sept 2007 30) has the right to buy the stock microsoft(1 contract = 100 shares) untill september 2007 (3th friday) to an exercise price of 30$,he pays a premium for that. When microsoft are higher on that date then 30$+ the premium he has paid,he makes a profit. When it's lower then 30$ he looses only the premium he has paid before. The open seller of this call option must sell the stock microsoft on the price of 30$ when the buyer of the call option asks for it,he gets the premium for it from the buyer. Possibility 1 : the open seller of this call option ows shares of microsoft ,there's no problem when the buyer asks for delivery. Possibility 2 : the open seller owns no shares of it ,the seller must buy the stocks on the open market to delivery,the price of it is higher then what he gets and he could loose a lot of money when the shares of microsoft has risen spectaculary. The buyer of a put option (exemple sept 2007 27.5) has the right to sell the stock microsoft on the price of 27.5$ untill september 2007 (3th friday),he pays a premium for it. The open seller of this put option must buy the stock microsoft (27.5$)when the buyer of the put option asks for it,he gets a premium for it from the buyer. When the shares of microsoft was fallen dramaticly the open seller looses a lot,when the open seller has enough money ,he could wait for better times to come and keep his shares of microsoft,when he has taken to much risk so he couldn't afford to buy this shares (he had hoped microsoft stood above 27.5$ on the exercise date and he hadn't to buy )he must sell the shares on the open market.(with a loss). People who doesn't know about this sort of investments should stay away of it,they underestimates the risks.
28 Mar 07
I am not completely new to the stock market but I have always had problems understanding this part of it and unfortunately your explanation made it no clearer for me. Thanks for trying though. Maybe someday I will do a course to help me understand it better.
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