

In defense of complex financial derivatives - syntaxfree
http://dayvancowboy.org/?p=1

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Tichy
I wonder if that article has been written by a Markov Chain.

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mmmurf
He's right. Derivatives are nothing but mathematical relationships between
other things. If those other things have prices, then the derivative has a
price in relation to them.

Derivatives are useful when you want to design an instrument with specific
risk/return characteristics.

In the case of the derivatives that everyone is blaming for the financial
crisis, they were considered low risk. But only because everyone thought that
housing prices would not dip more than a few percent.

There is nothing "riskier" about such a derivative than there is about someone
buying a house, also thinking that housing prices wouldn't dip more than a few
percent, yet nobody is suggesting that home purchases be banned.

There is also the issue of flawed ratings given by Moody's, which resulted in
derivatives whose risks were not accurately calculated and thus not accurately
priced.

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davidw
It might be a defense of complex financial derivatives if you're willing to
work through the jargon, but otherwise it just looks like a bunch of technical
blah blah being thrown around without much in the way of actual "defense of
complex financial derivatives". Either he's aiming for the few who understand
what he's saying (which seems odd - presumably they're able to form their own
opinions, due to their knowledge of it), or he's unable/unwilling to put
together a pursuasive argument in English, which makes it sort of a waste of
time.

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likpok
Paraphrased (ignoring some of the jargon): QSF (the quantitative techniques
for finance) aren't inherently bad, just run into issues when they are tied to
the actual markets. In addition, he claims that the results were probably
overemphasized (like most new tech, it seems that people thought it could do
more, and that it was more rigorous than it was).

In short, the defense is this: We were doing it wrong, we should do it better.

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davidw
There are people out there who think we should untie these things from 'actual
markets', so that seems like an odd thing to be saying.

