SWAPTIONS: ANOTHER TALE OF THE DERIVATIVES BEAST
So, we get more ’swaptions’? I don’t 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 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.
But if one is clever, one can make oodles of money playing with the hazards, faults and quirks of this system. It is extremely unstable in aggregate. Like a wagon being driven along a cliff edge, all the horse has to do is take the bit or throw a shoe or the wheels hit a rock and everyone goes tumbling off the cliff.
Ever since the floating currency was created, the gnomes assured the public that they were sober and careful drivers and would never, ever whip the horses to go faster. Then they whipped the horses and drove the carriage off the cliff! I have this thing about hazards: if we protect people against all possible hazards, they will try very hard to find some reckless, stupid and dangerous thing to do just so they can do it.
It is human nature! And trying to make money in funny ways is a lot more fun than working hard and slowly accumulating it over time. Instead of transforming one’s labors in the physical world into something else like pulling up tree stumps to make a field that can be plowed, for example, people want to get rich placing bets.
Swaption - Wikipedia, the free encyclopedia
There are three styles of Swaptions. Each style reflects a different timeframe in which the option can be exercised.
Well…in the Wikipedia article, J.P. Morgan is mentioned as one of the swaptioners. This last Friday, they gave up on their Mortgage-Backed Securities. Well, they held a lot of those! And we wonder where it all went….
“What are Banks doing with the Bailout Money?” by Cliff Küle. FSO Editorial xx/xx/2008
A good graph from Mr. Küle. I guess that the DTCC notice is all about this ‘deleveraging’ that is going on. Namely, I suspect that all those darling little mortgage securities are not secure at all and so they were unceremoniously dumped into the stew pots of the Federal Reserve. These mortgage securities are no longer being sold because they were exchanged for Treasuries. Thus, J.Pirate Morgan is ‘recapitalized’ and is now expected to lend money to us. Money which is OUR money. For Treasuries are IOUs on future tax revenues!
As for the $30 trillion or even $100 trillion in losses: no one knows! Küle talks about the Bloomberg lawsuit, we are all interested in this matter. For the Treasury as well as the Federal Reserve are playing this kiss-and-don’t-tell game with a bunch of crazed gnomes! They want desperately for us to look aside.
All the people at the top piously talk about being open and not hiding things from us…even as they hide a tremendous amount from us. The owner of Bloomberg News is the mayor of NYC. And he can’t get the information! Who has it?
Ah! The list of the guys in the Wikipedia article about ’swaptions.’ While rooting about the internet, I found this web page about options. The investment house hosting this article has some very funny things to say:
Image Financial - Tutorials - Options Basics
HAHAHA. J.P. Morgan and Goldman Sachs didn’t invest with risk capital. They did it with leveraged junk from the Bank of Japan! And when the leverage flipped and the yen went strong, they were strung up, weren’t they? Their mortgage securities went sour. So what risks did they take?
SSRN-Risk Sensitivities of Bermuda Swaptions by Vladimir Piterbarg
Barclays Capital
November 1, 2002
Bank of America Working Paper
We present new theoretical results for risk sensitivities of Bermuda swaptions, and derive new representations for them. We apply these results to the problem of risk sensitivities computation and derive algorithms that perform the task much faster and more accurately than the traditional approach.
Computation of risk sensitivities to market and model parameters (deltas, gammas, vegas) is one of the most important applications for any model. In most practical situations, the Greeks are computed numerically by shocking appropriate inputs and revaluing the instrument.
The time needed to execute such a scheme grows linearly with the number of Greeks required. Our approach allows one to compute any number of Greeks for a Bermuda swaption in nearly constant time.
Computational advantages versus the standard approach are significant, with time needed to compute a large number of sensitivities reduced by orders of magnitude.
Our approach explores symmetries in the structure of Bermuda swaptions, and is essentially model-independent. The approach is based on a newly discovered set of recursive relations between different sensitivities.
The recursive relations allow us to represent sensitivities in a number of interesting ways, in particular as integrals over the “survival” density. The survival density is obtained as a solution to a forward Kolmogorov equation. This representation is the basis for practical applications of our approach.
I fear, alas [I couldn't access the entire paper to read it!] that these ‘new discoveries’ were actually DEFECTS or FLAWS in the systems analysis. These were sensitive things meaning, once the wolves pounced on it and began to use it to rip out more wealth for the Bank of America, for example, it made the horse and carriage I talked about at the top, go off the cliff.
And what is the ’survival density’? I don’t know! I didn’t get the paper to read. But I fear it had something to do with things that can kill us. I mean this: the banking system’s total failure to handle excess debt creation has caused a collapse of everything. The hedges, the derivatives, the options, the over the counter and under the table things are all destroying wealth. Very rapidly.
And we see the seeds for all this in papers like the one above. Even when weaknesses were located, instead of correcting them and preventing them from worsening, the bankers all tried to exploit them in clever ways! And these ways were all dead ends.
Below is a news story from right after Lehman Brothers and AIG went bankrupt last September. It is from the OTC Bulletin news web page, last October:
OTC trades which are of dubious legality as is, were halted. As I suspected, the derivatives market was DEAD. They then rigged the game with the help of the Federal Reserve and the Treasury so it would look as if everyone could unwind the Derivative Beast’s mighty girth and thus, make things ‘normal’ again.
Only this failed utterly. No one is really fooled. This, as usual, reminds me of the Gods and Goddesses. In ancient Norse tales, there is this queer story about Thor and the Ice Giants. They made bets with him and one was to drink from a magic drinking horn.
He couldn’t drink it all! This was because it was the world’s oceans! He did drop it by one inch. Then, they bet he couldn’t pick up their pet kitty cat. He could only move the cat’s belly upwards by one inch. It threatened to claw him so he put it back down.
The cat was really the World Serpent, Ouroboros. The snake that circled the planet. So it is here: the gnomes made a magic deal with the computers and the math wizards. If they would find flaws, interesting equations and other things, the gnomes would pay them a fair income while they, themselves, collect many billions of dollars, doing nothing but paying a bunch of computer geek wizards!
Only they all forgot something: no system works this way in reality. So they ended up thinking Ouroboros, the world serpent, was merely a small kitty cat. They though the Derivatives Beast was only a small drinking horn. And now, we are expected to drink an ocean of red ink for them and pick up a monster that is bigger than the entire world’s GDP.
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