Be Very Afraid by Finance News Bulletin

Published: 04/12/07

Occasionally you see a sign that takes your breath away You can't quite get your head surrounding it, you just know it's a knockout numberSo on reading nowadays that the total ‘value' of worldwide derivatives - financial instruments derived from fundamental assets - has now soared to $516 trillion, I tried hard to get a hold on what that meantUp by 25% in the six months to June 30 compared with a 12% go up in the second half of 2006, according the Bank for International Settlements (BIS), in the main trek seen since the Basel-based Bank started amassing data

Eminent authorities like the World store and International Monetary Fund (IMF) quote global GDP (gross home product, that is the total value of all merchandise and services produced) for 2006 at $48 trillionFor the current year, the IMF has forecast overall yearly production increasing by nearly 5%, leaving world GDP standing at just over $50 trillion by end-December Roughly in row with the sum worth of global stock marketsSo the aggregate amount of derivatives sloshing round the system has now escalated to over ten times the sum total of the earth's human endeavours, having grown at its best rate in at least nine years during the first half of 2007

The trail was blazed by a 49% surge in credit non-payment swaps, effectively derivative insurance cover that investors can pay money for to protect themselves against growing non-payment risks as US mortgage foreclosures hit record levels Actual cash at risk through credit non-payment swaps rocketed 145% from last day to $721 billionInterest rate derivatives grew by 19% and foreign swap derivatives climbed 21%, with rapid growth in contracts on currencies similar to the Canadian, Australian and Hong Kong dollarsOver the three existence to June 2007, commodity derivatives have grown six era, chiming with comment from Paris-based think-tank PetroStrategies that speculative trading in lubricate futures contracts has risen from less than 1% of the sum amount traded to more than 32% over the five years to 2006

Equity marketplace derivatives jumped by 23%, with growth highest in Latin America at 43% and lowly in Japan at 6%Over the same six-month era, Japan's Nikkei 225 index rose 48% while the MSCI Latin America index increased 25% attractive

I don't claim to, and I'd gamble that there aren't too many people out there who genuinely understand all the ramifications of all this exposureThere's no catch-all gauge but the cost of replacing all unlock contracts at today's prices, described by the BIS as ‘gross market worth', rose by 15% to $11 trillion by end-June And that was before the praise crunch hit big-styleNo doubt derivatives apologists will claim so as to so as to all these involuted instruments actually diminish danger because they better enable investors to hedge their bets

That the financial system is so much more complicated nowadays that there's really much less chance of anything going incorrectGiant insurer Swiss Re admitted on Monday having to make a £530m record on

er, credit default swaps Credit derivatives wounded have been cropping up all over the banking system, even amongst debt assurance insurers like US mortgage finance house Freddie MacAnd we've seen how dreadfully faulty many of the supposedly perfect hedge fund models have proved to beSo when I reflect that all these complex financial crop, valued at ten times the world's financial worth, are operated by the very same people who have already admitted wasting $40bn in the sub-prime debacle, with goodness knows how many more billions to follow, I feel fairly scared

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