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Are Financial derivatives actual derivatives (rate of change of the rate of change) or differences (how to put this ... rate of/actual separation distance?)

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

by ATinNM on Wed Jul 4th, 2007 at 12:22:27 PM EST
They are instruments that work off the back of the behavior of other financial instruments (derive from them). You could call them meta-securities, in a way.

For instance, the simplest derivatives are puts or calls, i.e. the right to buy or sell a share (or bond, or whatever) at a given price at a given date.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jul 4th, 2007 at 12:27:10 PM EST
[ Parent ]
And if you borrow to invest in them you get second level gearing, presumably?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Jul 4th, 2007 at 12:52:01 PM EST
[ Parent ]
Usually you don't borrow so much to buy them: they are cheap if they are "out of the money" (little probability of turning true but you buy it to hedge against a market change disastrous for your other investments). And simple options are mostly traded for arbitrage (you buy and sell at the same time, some two stuffs of very close value because you found someone ready to secure the deals with you at a price spread that will make you a little money whatever the outcome).

Pierre
by Pierre on Wed Jul 4th, 2007 at 01:13:06 PM EST
[ Parent ]
I'm familiar with futures and options - I used to be a Director of the IPE - but I am unfamiliar with the effect of borrowing to buy CDS's and similar "toxic waste" which it appears to me essentially loads one level of gearing on another.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Jul 4th, 2007 at 01:20:27 PM EST
[ Parent ]
OK, then why the ** do they call them derivatives?

Oh, I see ... "bullshit" was already taken.  ;-)

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

by ATinNM on Wed Jul 4th, 2007 at 12:56:25 PM EST
[ Parent ]
They are called "derivative securitues" in the same fashion as "derivative work" is used in IP law. The value of a derivative security is derived from the value of something else.

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Wed Jul 4th, 2007 at 01:28:31 PM EST
[ Parent ]
Model-making of Finance is no longer my concern (Hurrah!  Hurrah!) so I'm not up on the lastest nonsense.  So time spent idly wandering through Wikipedia looking for the derivatives in Dervatives and not finding them has been puzzlement making.  Tho' my experience should have informed me that's the sort of thing Finance people do.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jul 4th, 2007 at 01:58:39 PM EST
[ Parent ]
The "mathematical" derivatives of the "derivatives price function" are called the "greeks" in our jargon, because they're designated by greek letters: delta for the derivative against a share price, vega for the derivative against a share volatility, etc...

More here:

http://en.wikipedia.org/wiki/The_Greeks

by Laurent GUERBY on Thu Jul 5th, 2007 at 01:41:27 PM EST
[ Parent ]
Never mind that "vega" is not the name of a greek letter.

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Thu Jul 5th, 2007 at 05:47:13 PM EST
[ Parent ]
This is getting sillier by the moment.

Poor old δ.  It was sitting there, happy, minding its own business when

WHAM

Finance happened.

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

by ATinNM on Thu Jul 5th, 2007 at 07:46:43 PM EST
[ Parent ]
neither are volga, vanna, velta, zorg...
finance just ran out of greek letters, so they had to invent new ones

Pierre
by Pierre on Fri Jul 6th, 2007 at 03:57:31 AM EST
[ Parent ]

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