Reply #22: Time for another of Tansy's questions about derivatives. . . [View All]

[Tansy_Gold]

I know that it takes a thousand billions to make a trillion, and I know that the November 2007 estimate was that the value of the derivatives market was over $500 trillion. So we're talking about 500,000 billion dollars in "notional" value, if I understand this all correctly (which I probably don't).

My question then is this: As these various banks and investment firms and others write down the value of various mortgage-backed and other failing assets by $10 billion here, $8.6 billion there, and a few billion tucked away in an off-balance sheet partnership, what effect does this have on that $500+ trillion in derivatives value? Does it have any effect at all? Does it just drop the $516 trillion by a few billion, a tiny fraction of a percent? Or does the same inverted pyramid that led to the $516 trillion decrease proportionally with the written-off billions?

Or have I misunderstood the whole concept? Is the "market" value of the derivatives a total of all the trading that goes on, so that if Bank A sells $1bn in derivatives and Bank Q sells that $!bn for %2bn, we now have a $3bn market?


From the inquiring mind of


Tansy Gold