Posted by: stillironic | September 11, 2010

Derivatives or the lint in your pants pockets, Part 2

Options, Swaps, and Sweet Nothings


deli counter at Zabar's


These guys are tricky bastards. They’re contracts giving you the right to buy the asset hiding behind the green door. Except you’ve got three green doors: the exercise your option to buy door, your trading the option out door, and your let the option expire door. If you want to do what most people do, you trade the option out or let it expire. But you’re not most people. You buy the option at the specified price and then lose a great deal of money. But that’s okay because you’ve listened to your derivative’s broker, coke addled though he may be, and only used your “risk capital.” (Hint: If you’re married and haven’t limited your speculation to risk capital, you may as well sign the divorce papers now.)

All is not lost, however. The beauty of options ensures that you can easily impress future spouses—and casual sex partners—by discreetly dropping options-trading lingo into your sweet nothings. As in “I love nibbling on your chubby little earlobes, dollface, right before I close my position.” “And tell me, snookums, if I exercise my option will you exercise yours?” Trust me, whisper options lingo to your honey and he or she will be putty in your hands.

kitchen counter



There are two kinds of swaps, plain vanilla interest rate swaps and currency swaps and they’re both traded over-the-counter. Over what counter is unclear. A deli counter, a kitchen counter, the Chanel counter at Saks Fifth Avenue? Perhaps you have to join the International Swaps and Derivatives Association to learn. My question is if swaps are derivatives why does this group use “swaps and derivatives” in its name? Peanuts are legumes. Would it make sense if the legume lobby called itself the International Peanut and Legume Association? I think not.

Currency swaps occur when, for instance, a company from the Aquarius Dwarf galaxy needs dollars and a U.S. company needs ЖИШ∞∩s, the Aquarius Dwarf currency. In a plain vanilla swap, however, two companies trade cash flows based on the same dollar, yen, or ЖИШ∞∩ amount except that, for instance, Alcoa’s interest rate is fixed and the Kryptonite Company of Aquarius Dwarf’s floats. Swaps supposedly help companies reduce uncertainty. These companies evidently can’t follow my favorite path to reducing uncertainty: staying home and avoiding contact with other people.

make-up counter


Last: The battle over derivatives being waged right now between us, the U.S. taxpayer, and the forces of evil.



  1. No wonder we’ve been like lambs to the slaughter. And how did you get so good at knowing this stuff? Clinton should have known better than to sign any bill authored by Phil Gramm. Sure, he’d been a little preoccupied, but look at the havoc that’s been wrought from allowing banks to treat our savings like Monopoly $$.

    • The banks, especially the big investment banks, are happy we don’t understand this stuff. And they want to keep it that way so they can continue to reap outrageous profits.

      I only know enough about this stuff to make fun of it. I read Gretchen Morgenson in the NYTimes on Sundays and when I worked at the Univ of MD I got my MBA for free.

      One minute I think I understand derivatives and the next minute I forget what I learned.

  2. STOP! JUST STOP! I can’t take any more of this! It is too confusing and depressing, and it is making my temporary crown tingle!

    Seriously, though–if more people in this country actually understood all of this and kept up with it, we may have been able to head off this disaster. Most of the issues that we are dealing with now began in the Regan administration, deregulating everything but safe sex.

  3. You’re so right. Knowledge is power. But this stuff is so convoluted and confusing. Reagan was lucky. He screwed up with dereg but didn’t survive and have to live down the consequences.

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