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Jim Rickards: It is the GROSS position that matters with DERIVATIVES

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#1 Steve Netwriter

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Posted 22 September 2010 - 04:13 AM

Jim Rickards on KWN 21st Sep 2010. Real Risk is GROSS Derivative Positions

"All these derivatives are weighted on a NET basis, and not on a GROSS basis, all my analysis says that the risk is not in the NET it's in the GROSS."

He then goes on to say most analysts claim the risks cancel out.

"My analysis is completely different, I don't think risk is normally distributed, I don't think systems operate in normal predictable ways, they operate very non-linearly, in unpredictable ways, and the risk is actually contained in the gross positions, not in the net positions."

To me his statement that "it's clearly dynamically unstable" makes sense, otherwise, there'd be no problem.

Fiat: What starts becoming worth less eventually becomes worthless.

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#2 DrBubb


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Posted 25 September 2010 - 10:43 PM

I heard that too,
And it left me wanting to send him an email. Maybe i will. If so, I will cc it here
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#3 G0ldfinger


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Posted 25 September 2010 - 11:20 PM

It all depends on maturities and priorities of claims, compatibility of claims (so they can actually cancel out) etc. I think it is quite complicated.

If I expect cash tomorrow and I want to pay it back next year, but my bank says OK, I can't give you the credit now since I am defaulting but let's call it quits, then I am still in big trouble, although netted/discounted today nothing has happened.

So, indeed, just netting it won't reflect the actual risk because it ignores important features of the structure.
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