Cretinous

Meanwhile, in the financial markets speculation has replaced real investment. This is logical because investing in new technologies in manufacturing or services is a much less safe bet for individual businesses than just getting on one of two gravy trains, the first being public sector outsourcing and the second financial derivatives.

Derivatives, for those who invest in them, are a zero sum game. They are thus riskier than investing in manufacturing or services.

5 comments on “Cretinous

  1. Derivative risk is computable and hedgeable. You get well-defined “alpha”. Risk of investing in businesses directly is much harder to quantify and you can’t hedge it.

  2. Yes, derivatives in isolation are zero sum. But in practice it’s often the case that one side of a trade is expressing a directional view, using the derivative to get the risk they want, while the other side is expressing a view of the fair value of the derivative, and will hedge out as much risk as they can.

  3. Hmmm. Technically not quite true. The sum is “the assumed risk-free interest rate”.
    The inverted commas refer to the fact that actually it’s the amount that would be earned over the actual lifetime of the derivative.
    Robbo’s comment also applies – there is friction. However ther is friction when you buy a bond. Fictions are much more substantial for an institution that’s actually dynamically hedging a derivative.

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