Felix Salmon responded to our post yesterday, It’s Time To Stop Being Scared By Derivatives’ Trillion Dollar Notional Values, yet failed to address the main point: For most derivatives the notional amount does not represent the amount of money at risk.
Derivatives’ $203 trillion of notional amount is not necessarily $203 trillion of money at risk.
To imply that this $203 trillion figure is something to fear is to greatly exaggerate the extent of derivatives’ risk. The interest swaps we mentioned yesterday shows one example of why this is the case.
That’s the extent of our argument. We agree that banks’ derivatives exposure deserve healthy scepticism and caution, as outlined in yesterday’s post. Yet exaggerating their risk distorts the issue. Thus we’re simply explaining what notional amounts are — and they aren’t what most people outraged over derivatives make them to be.
Felix’s continued use of the term “notional exposure” in place of what is actually “notional amount”, even in the title of his latest post, further suggests that it might be worth re-reading what our point actually was.
Felix Salmon: decade ago, when notional derivatives exposure started being measured in the trillions, bankers started wheeling out all of Fernando’s arguments in an attempt to reassure the public that there really wasn’t all that much risk here. And if those exposures were still only a trillion or two, I might not be all that worried either. But the likes of Fernando don’t seem to understand that when the notional exposure increases by more than two orders of magnitude, whole new systemic risks can come into play. Read >
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