Mike Markley says:
The derivatives market is a very dangerous place also. In yesterdays financial section here in Seattle there was an article about how Proctor and Gamble is reporting a loss of over $100 million in the mortgage derivative market.
Actually, there isn't much of a mortgages derivatives market -- unless you think of CMOs as derivatives. The P&G loss was reportedly in some interest rate swaps, although I haven't read too much about it. Derivatives are no more dangerous than any other instrument. Its just that because they are often highly leveraged you can make or lose far more money as a percentage of your investment. However, there is no requirement that you leverage yourself that much -- people just choose to do so.
Also in RISKS Digest 15.75 there is an article with the subject ' God Grants Granite Gift to RISKS Punsters' that talks about a company losing $600 million over the period of several weeks in the deriviative market.
I believe you are mentioning Askin Capital Management. They were trading CMOs, which are basically just packages of mortgages that have had some fancy footwork performed on them to allow investors to manage the prepayment risks. Their problems were due to illiquidity in their market, which tended to be for unusual or "junky" traunches of CMOs. Based on what I've been able to read, they were using an arbitrage strategy between mortgage securities that should have fallen in price with interest rate fluctuations and those that should rise -- by having a balanced book they should theoretically have been free of interest rate risk, but because they were highly leveraged losses in their portfolio could cause margin calls. Normally they could just have unwound their matched positions in such a situation, but when the market turned illiquid they got margin calls without being able to meet them and because they were highly leveraged they swiftly lost most of their capital. However, I'll note again they were not trading derivatives per se -- just repackaged and securitised mortgages. I'll point out that this is not the FinancialPunks list but the cypherpunks list -- I'll discontinue the discussion here. Perry