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Starfirenv (< 20)

Undrestanding Derivative Markets HMMM.



August 22, 2009 – Comments (5) | RELATED TICKERS: ALE , ING


An Easily Understandable Explanation of Derivative Markets
Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit .

By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand?

Author Unknown.



5 Comments – Post Your Own

#1) On August 22, 2009 at 8:43 PM, caterpillar10 wrote:

well as long as playah's got his bonus banked offshore b4 the bonds crater, what's the problem? 

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#2) On August 22, 2009 at 11:45 PM, BravoBevo (99.97) wrote:

I'm just wondering why you didn't include AIG as a "related ticker."

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#3) On September 17, 2009 at 11:43 PM, BravoBevo (99.97) wrote:

Starfirenv a/k/a Red Zone:  I've made you a trade offer in our fantasy football league.  You can see it over there. I'm probably giving away too much in this (my first trade), but perhaps the extra incentive will get the intra-league banter and trading started. Best wishes to you (and your Red Zone team this weekend).

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#4) On September 18, 2009 at 12:14 AM, Starfirenv (< 20) wrote:

Missed it. Wil ck manana. All the best. Congrats again. Ain't it sweet when you have the 3rrd lowest score and still win in a 14 team league?. Did you like the post? Got more. 7 stinkin' recs, don't know why I bother. G'nite my foolish brother. hey, you ski? Ever make it to Tahoe?

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#5) On September 18, 2009 at 1:03 AM, BravoBevo (99.97) wrote:

Omigosh, LOL, don't tell me that you're a ski instructor or part of the ambulance brigade.

I've always (practically speaking) lived in Texas.  We only have water skiing here.  I learned to downhill my senior year in high school on a trip to Santa Fe NM, and loved it. I'd go on a ski trip to the Summit or Aspen or Durango each year until I got married. My wife (never skied before) had a best friend (her college dormmate) Barb who lived in Phoenix.  So my wife and I, and Barb and her husband were all suppose to meet in Taos NM, but at the last minute Barb's family had complications ... so, instead, we flew to Phoenix and joined them.

There we skiied Sunrise (east of Phoenix) and Mt. Lemon (down by Tuscon).  Well, I see snow so rarely that whenever I ski I'm on the slopes from the opening of the lifts until the shadows are really dark. This being my wife's first time, she didn't like that pace.  In retrospect, I should have been more accommodating and slowed down. That was her first and last time. 

I was able to slip away a few years later and ski at Snowqualmie in Issaquah (outside of Seattle), but that's been my last time as we since have had kids, schools, parent-teacher meetings, saving for college, etc.

Talk to you soon. G'nite.

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