Derivatives Time Bomb

  

Warren Buffett, a.k.a. the Oracle of Omaha, a.k.a. one of the greatest investors of all time...coined the term. It refers to his warning of a hypothetical, all-hell-breaking-loose that would occur if the derivatives market suddenly crashed.

Buffett is not a particular fan of derivatives, deeming them too dangerous. And along with CMO leverage, the use of them almost cratered the financial system of the entire Western world in 2009. So...yeah, we get you, WB.

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Finance: What is a Derivative?23 Views

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finance a la shmoop what is a derivative? well it's derived it's a something taken

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from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]

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hunger is well you know crankiness that's diva thing you get there...

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derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah

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yeah discount double shmoop yeah look for it be on there with aaron

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and a derivative of a stock or bond or other security is a something which

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derives its value based on the performance of that underlying security

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there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]

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sell a security at a given price over a given time period and a call option, ie

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right to buy a security at a given price over a given time period

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well the price of that option is derived from the price of the security and a few

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other factors like strike prices and duration and all that stuff

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colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]

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for 25 bucks a share a derivative of its share price is sold in the form of a

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call option with a $30 strike price expiring about 90 days from now on the

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third Friday of the end of that month well investors pay a price albeit

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probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]

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electric at any time in the next 90 ish days until that option expires making the bet

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that the stock will go well above 30 bucks a share in that time period that

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call option is thus a derivative of the colonel electric primary stock price got

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it if you really want to get personal well here's the ultimate form of

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derivative [Baby laying down]

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