October 8, 2011
derivatives are difficult to value, and risk is volatile. i think that funds do not need to take on this risk. at the very least, funds and other institutions should disclose in financials the risks and the factors that those risks depend upon.
how does anyone know that a buyer understands what they are buying or the seller knows what they are selling. does the seller have MORE information than the buyer?
if clients vote with their feet and cause institutionals large redemptions, derivatives are not liquid enough to guarantee that they can be redeemed at any time.
counterparty risk introduces a whole new dynamic to the risks. if a counterparty cannot pay, then an endorser must cover.
i don't care if derivatives might pay a higher rate than options or stocks or other financial instruments. the reason derivatives have the potential to pay at a higher rate is because the risk is higher.
if financial professionals must gamble, perhaps they need to go to treatment.