In pursuit of cheap sensationalism


Despite the cries of the tabloid press, bloated crisis Long-Term Capital Management to epic proportions, its activities in the professional futures market as an example for a high-quality portfolio management of derivatives.

Crafty figures

On the U.S. futures market, the main party is acting as financial supermarket - JPMorganChase. He is the leader by volume of open positions of commercial banks and trusts. Once the bank has a large portfolio of derivatives, it is, in the opinion of Alexander Hamilton - "master swindler derivatives market." The "analyst" refers to the market statistics. I'm not lazy and spent an hour to pick up the financial statements JPMorganChase and find out the real situation, because intuition: in Hamilton arguments wrong. The report of the Office of the Comptroller of the Treasury of the United States March 31, 2002 can be found that the nominal volume of derivative contracts concluded at JPMorganChase was $ 23.48 trillion. Most of the transactions was made in the OTC market with the largest international financial institutions in the U.S., UK, Switzerland, Japan and the euro area.

According to the Bank for International Settlements, as of December 2001 the total volume of the derivatives market at par value (notional amounts outstanding, NAO) is $ 111.13 billion. Thus, JPMorganChase nominally controls 21% of the derivatives market.

Hamilton somehow took assessment only on the U.S. market and even excluded from the attention of its leading players - investment banks. As a result, "analyst" turned out fabulous figure - 60% of the market! In fact, his numbers - are evil.

About 90% of all financial derivatives JPMorganChase - are interest contracts. Commenting on the nature of the interest rate derivatives, Hamilton considers the example of the interest rate swap, which insures the borrower interest payments. Actual exchange of interest payments on the loan of $ 1 million, as noted by Hamilton, could range from a few tens of thousands of forces dollars. But at the same time, he argues that bank acting counterparty to the transaction, is at risk in the amount of the nominal amount of the contract, ie $ 1 million in other words, JPMorganChase risk losing $ 1 million What is it to be for the interest if the bank will have to pay $ 1 million? Obviously, Hamilton, trying to convince the reader that he was right, just distorted the essence of derivatives.

To avoid such absurdities in the world for the valuation of derivatives to the concept of the accumulated volume of total market value (amounts outstanding in gross market value, GMV), which is the cost for a financial contract to the prevailing market prices. GMV can be either positive or negative. In the case of JPMorganChase a portfolio of financial derivatives at current prices would bring him $ 541.34 billion, and not astronomical $ 23.48 trillion. From the value of the gross market value, the bank "owns" 14.3% of the market, not 60%.

How risky position JPMorganChase? If you submit a portfolio yield of derivatives as a random function, which are equally likely to be as profit and loss, bank losses will not exceed a couple of billions of dollars. That is the average yield on the balance sheet items at JPMorganChase. In particular, last year, he has earned in the futures market $ 1.23 billion a sham designed to trillions Hamilton unsuspecting reader.