When you buy a “future,” you’re actually making a third kind of investment that’s neither debt nor equity. That is, nobody owes you money, and you don’t really own anything yet. What you’ve bought is one type of those allegedly supercomplex and supposedly ultradangerous items called derivatives. You remember how in 1995 a semieducated young wanker in Singapore, fiddling with derivatives, brought England’s noble, ancient Barings Bank to its knees, and now everyone in the House of Lords is selling fish and chips. And you heard how in 1994 the treasurer of Orange County, California, picked up a derivative hitchhiking on Sunset, drove around the corner for a little fiduciary slap and tickle, and the next morning an entire suburb of Los Angeles awoke to find that its streets and sewers had been sold at a bankruptcy auction. Considering the way things turned out for England, Orange County, and you in the commodities market, derivatives do seem daunting. But, in fact, all that the three of you did was make deals with other people in the market. A derivative is a deal about buying or selling rather than the buying or selling proper. When you own a derivative, what you own is a bargain that you’ve made. You’ve promised to pay or charge a certain price for a certain thing to be received or delivered at a certain time. Where it gets confusing is that this promise itself can now be bought and sold. Derivatives are so-called because they “derive” their value from other more straightforward investments, such as just plain owning cows, Orange County, Singapore Slings, or whatever. These things are known as the underlying commodities. The derivative is the deal. The underlying commodity is what the deal’s about. Derivatives are risky. But risky is the point. Derivatives are a way to buy and sell risk. Big risks mean big rewards. Some people can afford more risk. Some people like more risk. And some people are as chicken as I am. You’re into derivatives whether you like it or not. Your adjustable-rate mortgage is a derivative: You got a deal on a loan that was cheaper, at that time, than a fixed-rate mortgage. In return, you’re taking a risk. Your risk is that the amount of interest you’ll pay in the future will be derived from a formula involving the prime rate, T-bills, and the chairman of Chase Manhattan’s boxer- shorts-waistband size. In this case, the underlying commodity is banker fat.
Now that we've become experts on every kind of investment, we can figure out
Made with FlippingBook - professional solution for displaying marketing and sales documents online