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SWAPTIONS: ANOTHER TALE OF THE DERIVATIVES BEAST

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Joanne98 Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Dec-08-08 06:01 AM
Original message
SWAPTIONS: ANOTHER TALE OF THE DERIVATIVES BEAST

While reading about the economy, I came across a word I didnt see all that often. Having some time on my hands as the snow blew outside the window and Jack Frost tried to freeze everything to the ground, it was time to try to figure out yet another gnome scam: Swaptions.
I periodically visit the DTCC to see if they have any news. This appears boring only if we dont care to understand the underpinnings of our systems. Here is one news story that sent me out to try to figure out what the hell they are talking about:


www.dtcc.com :

# :700

Date: December 03rd, 2008

To: Distribution

From: Deriv/SERV Product Management

Subject: Deriv/SERV Interest Rates Release 4.4


Deriv/SERV will implement various enhancements to the Interest Rates platform at the close of business date (NY) on December 4th, 2008. There will be an expansion to the current Interest Rates Product Coverage to include American and Bermudan Swaptions. There will also be a series of validation and matching changes designed to improve STP matching rates. A range of GUI

enhancements will also improve the Users experience on the Interest Rates Platform.


Product Coverage


As part of the 4.4 Release, Deriv/SERV is expanding its product coverage to include:

Bermudan Swaptions

American Swaptions

So, we get more swaptions? I dont know, this sounds very suspicious. As usual, these stupid things that the DTCC wishes to expand are the exact same things that are destroying our financial systems! After all, the people using these things are nearly all gnomes! Yes, this is 100% gnome business.

Swaption - Wikipedia, the free encyclopedia

The participants in the swaption market are predominantly large corporations, banks, financial institutions and hedge funds. End users such as corporations and banks typically use swaptions to manage interest rate risk arising from their core business or from their financing arrangements. For example, a corporation wanting protection from rising interest rates might buy a payer swaption. A bank which holds a mortgage portfolio might buy a receiver swaption to protect against lower interest rates which might lead to early prepayment of the mortgages. A hedge fund believing interest rates will not rise by more than a certain amount might sell a payer swaption aiming to make money by collecting the premium. Major investment and commercial banks such as JP Morgan Chase, Bank of America Securities and Citigroup make markets in swaptions in the major currencies, and these banks trade amongst themselves in the swaption interbank market. The market making banks typically manage large portfolios of swaptions which they have written with various counterparties a significant investment in technology and human capital is required to properly monitor the resulting exposure. Swaption markets exist in most of the major currencies in the world, the largest markets being in U.S. Dollars, Euro, Sterling and Japanese Yen.

The swaption market is over-the-counter (OTC), i.e., not traded on any exchange. Legally, a swaption is an agreement between the two counterparties to exchange the required payments. The counterparties are exposed to each others failure to make scheduled payments on the underlying swap, although this exposure is typically mitigated through the use of collateral agreements whereby margin is posted to cover the anticipated future exposure.

The biggest, baddest of the gnome universe use these swaption deals to make deals with each other. This way, they all get profits which grease the wheels for more derivative deals. The floating currency game has created opportunities to make money appear magically in many mischievous ways. It is a totally wretched system for international trade.

Continued>>>
http://emsnews.wordpress.com/2008/12/07/swaptions-anoth...

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madrchsod Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Dec-08-08 06:05 AM
Response to Original message
1. banks did the same thing with oil futures
they basically ran the price up by trading between themselves on the price of oil. it is legal to do so because they had any regulations removed on these trades.
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Joanne98 Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Dec-08-08 04:08 PM
Response to Reply #1
2. Is that that called "corporate paper"? I keep hearing that term.
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