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I'm waiting for the derivative market to experience a prolonged monetary contraction.  I haven't actually written and run a simulation, primarily because I don't care any more, but I think loses will be much greater than expected (possibly over 100%!) due to a thin secondary market and the fact the downside of a leveraged financial instrument is greater than the upside.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Apr 23rd, 2007 at 11:07:40 AM EST
What's the demographic breakdown of people who primarily play with derivatives?

Is it primarily pension fund managers, or primarily mavericks and hedge fund 'activists'?

I'm thinking if it's the latter - too bad.

The former might be more of a problem, of course.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 23rd, 2007 at 12:18:51 PM EST
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I dunno what the money breakdown is, but all the big banks have huge derivative portfolios both for themselves and indirectly since they loan the money for traders.
by citizen k (sansracine yahoo.fr) on Mon Apr 23rd, 2007 at 03:35:24 PM EST
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Pension funds, Money Market Banks, International Banks, hedge funds, arbitrage firms, the big stock market companies, buy-out firms, "privatization" companies, mutal fund companies, major international corporations, & etc & so on.

Even some goverments have gotten into the act.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Apr 23rd, 2007 at 06:42:16 PM EST
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From my perspective, it seems fragile. But maybe it is really doing what it is supposed to be doing and managing risk. The problem comes if the models are wrong and an assumption that A goes down only when B goes up runs into a situation in which they both drop like rocks.
by citizen k (sansracine yahoo.fr) on Mon Apr 23rd, 2007 at 10:44:27 PM EST
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I agree that the principal risk - and it is truly systemic - is the "rush for the exit" liquidity risk.

But beyond this, I think that the increasingly consolidated clearing houses
have become - unrecognised by most commentators - entities which constitute "single points of failure" undercapitalised for the risks that they actually run (as opposed to those they THINK they run).

IMHO, in the energy and/or metals markets at least, a "fat-tailed" market "discontinuity" is inevitable in the near future.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Apr 23rd, 2007 at 12:23:47 PM EST
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