Leverage & Derivatives

Derivatives contracts allow you to make bets on an asset without owning it. Like a side bet. I don’t have to own, watch, or like the Dallas Cowboys to bet on their success / failure.

You can bet on a company by buying its stock, or you can bet someone that it will go up. The latter is a derivative contract. Today the $$$ value of side bets exceeds the trading in original securities by a factor of 40.

For example there is $800 million worth of wheat (3 million metric tonnes) in the world — or at least that’s this year’s production of hard red winter wheat #1, ordinary protein.

But on the Chicago Board of Trade alone there were 22 million bets this year, betting about those 3 million MT.

Supposedly there are $1 quadrillion worth of derivatives contracts being traded today.

People talk about it like it’s a bad thing — but it’s neither good nor bad, by itself. It’s scary for regulators because they can barely measure, much less control, what people are doing with their money. They worry about systemic collapse on the one hand, if people make correlated mistakes — but on the other hand, if they over-regulate then they will choke off freedom of property.

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About isomorphismes

Argonaut: someone engaged in a dangerous but potentially rewarding adventure.
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