Posted by: stillironic | September 8, 2010

Derivatives or the lint in your pants pockets, Part 1

Let’s be frank here. We all need to know about derivatives. Derivatives are where the money is.

First of all, contrary to popular belief, derivatives aren’t exactly like the lint you find in your pants pockets. That’s because you can’t trade lint or hedge against lint’s decline in price—known as going short. Or going long. One of those. Speculating about lint is also dangerous unless you don’t mind your friends and colleagues—even your mother—calling you a moron.

lint in pants  pocket

The lint derives from the pants pocket

No, derivatives are highly complicated and risky financial instruments that only people high on cocaine get involved in trading. That’s why I recommend using a broker. Let the broker deal with the addiction issues.

As I’ve said, derivatives are called “financial instruments.” That there’s something sexy about this term is beside the point. The point is that not all instruments are of the music-making kind. There are also medical instruments, like lumbar puncture needles and brain drills, most often used on “House,” except on patients who have Wilson’s Disease or are infected by ticks. On “Grey’s Anatomy” most patients die because the doctors are all so busy having sex with one another or hallucinating that they’re having sex with dead people.

Hallucination and feeling compelled to read bad literature are just two of the many side effects people have reported after trading derivatives, successful or no.

Now, the three most talked-about forms of derivative are futures contracts, options, and swaps. Which form scores the most points in conversations with the sex—opposite or same—you’re trying to attract at parties is futures contracts. They’re the easiest to explain, especially when you start tearing off each other’s clothes. So let’s start with the form most likely to get people down to their underwear.

Futures contracts

A key rule in speculating in futures trading or any other derivative is never use your lunch money. However, you can enter into a futures contract that projects how much lunch money you will need to buy, say, nut clusters on some future date. You need to be a hedger, a speculator, or an idiot, to bet on nut clusters. But remember, nut clusters aren’t what the futures contract is all about. They’re just the underlying asset. The contract is about how much the nut clusters will cost.

Hedgers are trying to minimize risk. They’ll lock in today’s cost of nut clusters for the nut clusters they plan to buy six months from now. Speculators are increasing risk in hopes of a big payoff. They might bet that nut clusters will decrease in cost because they foresee a glut in the nut market. Futures contracts eventually end in liquidation, though no actual liquid is involved (so I’m told).

Next: Options, swaps, and sweet nothings

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Responses

  1. It’s really funny: Mamie used to say how much she loved my financial instrument. I couldn’t figure out what finance had to do with playing a clarinet, and said so. She told be I was cute, but that I shouldn’t count on any futures contracts.

    She also said something about a swap with Bess Truman, but thought that Harry held all the options there. Something about his long train trips and whistle stops. Then she rubbed my head and sighed and said that she wished I was more like Adlai. Right then, I wished I was too because the bald wig had gotten uncomfortable.

    • Sometimes Mamie was too enigmatic for her own good. I think she might have been suggesting a threesome, but with whom is unclear. So happy Adlai got to have a second life as Prince Philip, Duke of Edinburgh. But too bad about the lobotomy.

  2. She got kind of sad when talking Harry and Bess’ whistle stops, and wished that she more of them of with Ike. When I told her than a plane would be faster than a train, she said that Ike was plenty fast but didn’t have much of a cash flow. Mamie was very mysterious and I didn’t always understand what she meant. But those bangs! Man, they will get a guy every time.

    • I’m willing, if you are, to keep Ike’s cash flow deficiency between you, me, and Mamie. Now we know why Steven “Truthiness Is Better than Fiction” Ambrose never wrote about it. Speaking of Mamie, admit it, her inscrutability did it for you as much as the bangs.

      • The inscrutability thing appealed to a low grade yellow fever that I can’t seem to shake.

      • Rest and drink plenty of Guinness.

  3. Okay, you got me on this one. My brain freezes up with even a hint that math might at some point be involved.

    • With me and Mamie, it was like Pete Townshend said: One and one don’t make two, one and one make one.

    • Sorry, ’bout that! But no math, as I’m not mathematically inclined either.

  4. This is hilarious!! My husband used to be a stock broker years ago, and he told me about that stuff, but he wasn’t anywhere near as funny as you are! Good work!!!

    • Why thank you, Judie! So nice to hear from you!


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