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Global derivatives market value reaches $ 1 quadrillion

Global derivatives market value reaches $ 1 quadrillion

15 September 2020

Imagine you have a mortgage from a bank. And the bank always strives to earn even more profit. To do this, you can sell your loan to another bank, but for a single loan there is a high risk of non-payment of the loan (job loss, salary cut), so it is difficult to sell one loan.

But if the bank takes thousands of mortgage loans and combines them into one package, then the risk of default will decrease, because the likelihood of bankruptcy of all borrowers is extremely low. This process of consolidating debts into one package of securities is called securitization, and the new package of securities itself is called a derivative.

The derivatives themselves can be securitized. This process inevitably leads to inflation of a bubble in the financial markets, which will burst sooner or later.

Securitization was especially acute in 2008 in America. The problem is that, purely mathematically, through securitization, you can neutralize the risk of one single debtor, but you do not have insurance for the industry as a whole. It is this now already obvious truth that was revealed in 2008. More precisely, those who needed to understand it then, but now it is not about that.

Only one organization is responsible for inflating the bubble, as in all previous crises, securitization itself has nothing to do with it, like the derivatives themselves with their growth from year to year. The logic is broken here.

With the same success, you can link all previous crises (bubbles) with the number of shares / bonds in circulation, this number is also growing all the time. In quantitative terms, derivatives will continue to grow until the collapse of the entire system occurs. Even books have been written about this. In this case, you need to ask other questions altogether.

Sources: Visual Capitalist; Politeconomics.

Aravana Capital Management provides clients with profitability even during downturns in global equity and bond markets.


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