Derivatives = Gambling

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UnderDoggie

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Is it just me or do learning derivatives feel a lot like learning the rules to the game of crap? What about derivation of call/put's minimum value using porfolio method!? Are we going to get tested on that? Or are we just expect to use the equation to calculate the minimum value...? Sorry for the random rant, I'm just a bit frustrated to hit a wall toward the end of my reading... But seriously, any help on the subject is appreciated...
 
It's just you. Keep studying. Derivatives are about risk transference (among other things). Gambling is about taking on risk, usually with a negative expectation, for thrills.
 
The derivatives here are pretty simple and yes by using leverage you can sort of gamble with them or hedge risk.
 
Just get the terms right (Long/Buy; Short/Sell/Write) and learn how to draw the graphs. You figure everything out from there and forget troubling over memorizing each formula for each diff. type of option.

Remember the exam will be about fundamental knowledge not memorization. :)

...at least that's my approach.
 
Yeah, everything seems to be a lot easier after I got past the part on the Schweser note about how put/call minimum values are derived via portfolio method. I guess I was wondering if we can take the "short cut" by memorizing the formula for put/call min. values. Or should I go back and really get familiar with the logic behind derivation of the formula for the exam?
 
I've taken few derivatives courses and just to comment, the most important thing about derivatives is knowing what perspecitve you are looking from (i.e. the long or the short, especially when you get to valuation), this does throw some people off, especially if you are dealing with swaps. I've taken courses when they give you borrowing rates for floating and fixed and you have to determine who is the fixed and who is the floating through comparitive advantage, I know some of my course mates were thrown on a couple of those questions.



Edited 1 time(s). Last edit at Sunday, April 30, 2006 at 12:53PM by jamespucyk.
 
JoeyDVivre Wrote:
-------------------------------------------------------
> It's just you. Keep studying. Derivatives are
> about risk transference (among other things).
> Gambling is about taking on risk, usually with a
> negative expectation, for thrills.


Bullsh*t. Options, forward contracts and other derivatives are gambling. It's just gambling with a minimization of risk. By saying that derivatives isn't gambling implies risk-free investing, which is rare and shot-lived arbitrage.

Gambling is taking a risk for potential rewards. Just because you are making an educated guess doesn't make it something other than gambling. And that's all derivatives and hedging is: reducing risk, not elimating it. Again, if you can completely eliminate risk in all your investments, you would be the richest man on the planet. But, since that doesn't happen, you aren't.
 
LOL, well this is two sides of the classic debate. The answer is you can use leverage to hedge or you can use it hopefully double your retirement saving without losing it when that options contract expires on the third friday of the month.
 
c-hayhurst then by your definition all investments are gambling
 
Financial analysts shouldn't be having this debate. Does anybody seriously doubt that there is enormous use for derivatives as a way of hedging and transferring risk? A bond dealer enters into interest rate swaps to avoid interest rate risk in his inventory. A jeweler buys gold in the futures market. McDonald's borrows yen to build a restaurant in Tokyo and swaps currency because it will be receiving yen. A farmer sells his corn in the futures market so he can concentrate on farming not the price of corn. And the list is endless....

In fact, the global economic benefit from derivative risk transference is some gargantuan number (the notional size of all the derivative contracts is in the hundreds of trillions of dollars).
 
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