Notion of Derivatives

In the Berkshire Hathaway Annual Report of 2002, Warren Buffett details in detail how the discrete and macroeconomic risks of derivatives will pose a serious threat to larger financial stakeholders. However, Mr. Buffett uses large derivative transactions to facilitate the management of its stock transactions, because it can realize the benefits of microtransactions through parties that can transfer risk to financial markets I admit that. With this distinction in mind, this white paper aims to investigate how to use derivative risks to replace individual risks in the global financial system with a compound counter.

Since the risks associated with a certain number of nominal risks vary greatly from derivatives, - nominal number of different derivatives should not be aggregated. For example, the swap is basically the combination of forward contracts with the same nominal amount, so the swap fair value volatility is far greater than the fair value volatility for futures contracts with the same nominal amount. • Fair value reflects the recognition of post-hazard risk and generally has little impact on prior risk. However, there is one exception. In the assessment of credit risk, the fair value of a derivative in a derivative position represents the current maximum exposure. However, even if there is credit risk, the potential risk may be higher than the current risk exposure.

The chart above shows the total nominal value of derivatives against US asset indicators. It is noteworthy that for nominal observers, in many cases the nominal value of a derivative has little meaning. Normally, the parties can not easily reach the terms of entering into a derivative contract. A common solution is to create a contract that is equivalent to and opposite to another party in order to pay the net amount (derivative market # Netting), thereby eliminating the counterparty risk of the contract, while maintaining the nominal value of the unconsolidated contract It is to double the value.