Derivatives are synthetic securities, which is to say they are created based on other securities--the most infamous examples were the various mortgage-backed securities "products" which helped catalyze the Great Financial Crisis in 2008.
Consequently, there is not going to be a direct correlation between energy prices and derivatives.
Derivatives are synthetic securities, which is to say they are created based on other securities--the most infamous examples were the various mortgage-backed securities "products" which helped catalyze the Great Financial Crisis in 2008.
Consequently, there is not going to be a direct correlation between energy prices and derivatives.
Right now, the most likely trigger for a derivatives crisis is the same one which could trigger a liquidity crisis among banks (and, ultimately, a derivatives crisis and a liquidity crisis generally go hand in hand), and one potential cause of that is rising defaults in commercial real estate loans. The more stress banks have to endure, the more banks will buckle, and the closer we get to a tipping point on derivatives (the notional value of all outstanding derivatives worldwide is guesstimated to be over $1Quadrillion).
If the global economy continues to stagnate, that could elevate stress in real estate markets, which would increase commercial real estate loan defaults. Following on my working hypothesis, if the global economy continues to stagnate, oil prices will continue to fall. So while energy prices are not themselves directly intertwined with commercial real estate loan defaults, might serve as a leading indicator of rising loan defaults. Think of it not so much as a trigger but as the canary in the coal mine.
Derivatives are synthetic securities, which is to say they are created based on other securities--the most infamous examples were the various mortgage-backed securities "products" which helped catalyze the Great Financial Crisis in 2008.
Consequently, there is not going to be a direct correlation between energy prices and derivatives.
Right now, the most likely trigger for a derivatives crisis is the same one which could trigger a liquidity crisis among banks (and, ultimately, a derivatives crisis and a liquidity crisis generally go hand in hand), and one potential cause of that is rising defaults in commercial real estate loans. The more stress banks have to endure, the more banks will buckle, and the closer we get to a tipping point on derivatives (the notional value of all outstanding derivatives worldwide is guesstimated to be over $1Quadrillion).
If the global economy continues to stagnate, that could elevate stress in real estate markets, which would increase commercial real estate loan defaults. Following on my working hypothesis, if the global economy continues to stagnate, oil prices will continue to fall. So while energy prices are not themselves directly intertwined with commercial real estate loan defaults, might serve as a leading indicator of rising loan defaults. Think of it not so much as a trigger but as the canary in the coal mine.
Truly great answer - thank you!