Derivatives

The explosion of derivative instruments represents the monetizing of EVERYTHING. In today's Financial Times, there was the following headline: You may not be able to use the link without a subscription, but I'd be happy to e-mail it to any interested readers. Just e-mail me your e-mail address leisa-va@cox.net and I'll use the e-mail article function. Your e-mail address will be kept private. Here's the headline anyway with the link. I'm just including the first paragraph in honor of the subscription/copyright obligations:

Risks of derivatives 'not fully evaluated'

By Saskia Scholtes andRichard Beales in New York

Published: March 26 2007 03:00 | Last updated: March 26 2007 03:00

Fewer than half of global financial institutions account sufficiently for complex financial and commodity exposures in assessing the riskiness of their holdings, according to a survey by Deloitte.

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These instruments are beyond my abilities, but I'm sufficiently interested in them to pursue a bit of knowledge. I did a little nosing around and I found this article. Given the preponderance of hedging risks through derivatives instruments, and particularly if you invest in the financial sector, I would recommend your cultivating your knowledge regarding hedged risk. I found MOST of this article comprehensible, but my understanding is very limited. I'm in no position to educate you, but I'm in a position to make you aware.

I did note that LEND had $10M in hedging losses. I suspect that even if we do not suffer from some financial cataclysm, some dynamic shifts in the credit markets might provide some nasty surprises for folks hedged for one risk when the obverse materializes (causing the hedge position to be a loser--unless of course, the obverse situation is hedged). I wonder if company CFO's and/or Treasury heads know exactly what is in their banker's black box that calculates hedge settlements? I think that these are the stories that we are going to hear about more and more.