So there is a new legislation that would *nullify* these derivatives. But since Sinclair pictures derivatives as a tool for financial terrorism, here we go again: failure will be rewarded!
A Word on Derivatives
"...Derivatives are wonderful things, but. There is always a but, it seems. Without derivatives, insurance and risk management, it is impossible to imagine a modern commercial society. These are crucial to our economic health. But there is a dark side to these economic tools: while one party is hedging his risk with derivatives, another party is necessarily taking a risk. If this party underestimates the nature of the risk, there can be significant losses involved..."
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First, what is a derivative? You can go to The Derivatives Dictionary and get the classic definition, along with the definition of hundreds of various types of derivatives. (This site also has a wealth of information on derivatives and risk management, hedging and is a good place to go to learn about these topics in a fun and understandable manner.)
"Derivative product or derivative(s)": A financial contract whose value depends on a risk factor, such as:
the price of a bond, commodity, currency, share, etc.
a yield or rate of interest
an index of prices or yields
weather data, such as inches of rainfall or heating-degree-days,
insurance data, such as claims paid for a disastrous earthquake or flood, etc.
In short, a derivative is a financial instrument whose value is derived from something else. A stock option is a derivative. It is not the stock itself. The value of the option is dependent on (derived from) the value of the stock. Wheat futures used by farmers to hedge their operations are derivatives. Exchange Traded Funds (ETFs), which have only recently come in to existence, are derivatives. When you buy a Spyder, which is a stock listed on the AMEX and is basically an S&P 500 index fund, you are buying a derivative.
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The Trouble With Banks
Dr. Marc Faber
Banks have an uncanny ability always to enter a sector at the wrong time and near its business cycle peak. For example, banks continued to increase their loan exposure to Thailand and other Asian countries right up to the 1997 crisis. After the crisis -- when Asian assets had become extremely undervalued -- they began to reduce their loans. Then, instead of lending to Asia, which after 1997 had entered a relatively low-risk situation, they chose increasingly to lend to Argentina, which in their opinion offered better opportunities. Similarly, banks increasingly lent to the U.S. corporate sector until 2000, right ahead of the worst post-Second World War profit deflation. Thereafter, corporate lending was curtailed, but it was offset by increasing loans to the already over-leveraged consumer. Therefore, also from a fundamental point of view, I would be extremely careful about investing in U.S. financial stocks, whose combined market capitalization is still extremely high by historical standards. In addition, the financial sector is an industry that suffers from terrific overcapacities and -- as a result of the bear market -- from declining net asset values.
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