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Post by unlawflcombatnt on Jul 17, 2007 15:19:48 GMT -6
The following passage is from a Bloomberg article titled Derivatives Banks Concerned by Hedge Fund Leverage by Hamish Risk " Banks and money managers bought and sold about $50 trillion of credit derivatives in 2006, more than twice the total in the previous year, Fitch said. The market has grown 15-fold since Fitch started the survey in 2003, the ratings company said. The contracts, based on bonds and loans, are used to speculate on the ability of companies to repay debt...." The total worldwide value of derivatives is around $300 trillion. I have a question for anyone who can answer it. How do buyers pay for derivatives? What funds did they use last year to purchase $50 trillion in derivatives?
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Post by jeffolie on Jul 17, 2007 15:41:47 GMT -6
They can use investors contributions.
Or, they can borrow the money at almost no cost. This is done by the yen carry trade. Like the song "get your money for nothing...". The Japaneese lending rate is near zero.
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Post by jeffolie on Jul 17, 2007 15:52:16 GMT -6
It is like an Alt-A stated income 20/80 piggyback mortgage. The borrower just states that he will have income without needing to show any proof of income. The borrower gets a 'prime' mortgage by borrowing only 80% with 20% down. To get the 20%, the borrower gets a 2nd mortgage at the same time for the downpayment. These mortgages are sold to investors as AA or A mortgage backed bonds.
This is the piggyback process. Hedge funds do essentially the same fraud by borrowing the purchase price of the derivative from the Japaneese.
Why would the Japaneese provide virtually free liquidity? Because they have deflation. Their yen falls in value but their prices fall even faster.
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Post by jeffolie on Jul 17, 2007 16:01:20 GMT -6
I am not making this 'carry trade' business up. Here is the beginning of a piece on the carry trade: Carry Traders in Asia Look for Alternative Bets: Andy Mukherjee By Andy Mukherjee A display of Japanese yen July 17 (Bloomberg) -- Carry traders in Asia, having survived the initial jitters from the U.S. subprime-mortgage crisis, are now looking for funding currencies with less risk. While the Japanese yen and the Taiwanese dollar remain the vehicles of choice for financing purchases of the New Zealand dollar and other high-yielding currencies, the risk of a reversal in these trades is prompting the search for alternatives. The cost of money in Taiwan is rising, partly because the central bank wants to kill the carry trade and arrest capital outflows. Although the yen remains very much in play, no one knows for how long. The Bank of Japan may signal higher interest rates as early as next month. And that makes funding positions in yen very profitable, but dangerous. Amid these threats, the Singapore dollar may fit the bill nicely as a low-risk funding currency. www.bloomberg.com/apps/news?pid=20601039&refer=columnist_mukherjee&sid=aNnOKO1MsEm4
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