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Ophir

11,173 Posts.

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07/01/17

11:47

Post #: 21738224
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Originally posted by marri ↑

As a start read this from the FT

Two banks, JPMorgan and Deutsche Bank, account for about 20 per cent of total global derivatives exposure. Each has more than $50tn potentially at risk. The current market capitalisation of JP Morgan is about $200bn (roughly its book value); that of Deutsche, $23bn (about one third of book value). From one perspective, Deutsche Bank is leveraged 2,000 times. Imagine promising to buy a house for $2,000 with assets of $1.

Before you head for the hills, or the bunker, understand that there is no possibility that these banks could actually lose $50tn. The risks associated with these exposures are largely netted out — that is, they offset each other. As you promised to buy the house in question, you also promised to sell it: though not necessarily at just the same time or price or to the same person. That mismatch is the source of potential profit.

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No they're not "largely netted out". Look up the meaning of largely. The World Bank/IMF put their NET derivative exposure at US$750 trillion, or half their derivatives exposure. Lol. So one break in the chain in a credit freeze as in 2008 & it's sayonara. Given most of their risk is in interest rates, it's not a really pretty picture.
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