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The physics of Derivatives , the financial WMD

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posted on Jan, 2 2016 @ 07:40 PM
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I believe this may belong to the Philosophy and Metaphysics forum for reasons that should become obvious.

It was Warren Buffet who described derivatives as finacial Weapons of Mass Destruction. The Global derivatives market is estimated to be worth about 10 times the world's Gross Domestic Product. At the end of 2014 it was estimated to be worth 1.5 Quadrillion US Dollars. It is one massive bubble based on bets laid out (in the forms of Options, Futures, etc) based on expectations . It is not funds supported by assets but rather funds supported by the outcome of the "bet" on future prices.

I first came across derivatives while studying finance a few decades ago. It cropped up in the curriculum part dealing with financial intruments , of which derivatives (options , futures, etc) are one form.

I will not attempt to define what is a Derivative. I have seen a few threads dealing with it on ATS and nobody has yet described them in such a way that people will understand. This is because Derivatives are very complicated .

As part of the course, we were taught how to price options whether it was a "put" option or "call option". The former is an option to sell something (say shares) at a specific price in the future. The latter is an option to buy at a certain price. Please note that the option price itself is additional to the share price. It only gives you the option to but at say 250 cents per share in the future provided you bought the call option at say 25 cents per share now. You were then free to exercise the option or not depending on the eventual actual price. You could then also trade the option on the financial markets.

It was made very clear to all that the business of writing options was left to a special team of people employed by banks who in most cases had a background in Physics. That was a fact already known to us at the time , as bank had been (and are still) recruiting people with Phd in Physics to handle the derivatives side.

We were introduced to the key formula which is the Black and Schole model. That was the formula for calculating option prices at the time and still is. Though it is generally referred to as a mathematical model introduced by Mr Fischer Black and Mr Miron Schole it was in fact taken from Quantum Mechanics theory. This is one of the formulas used in Physics.

Everybody on the course was taught how to use the formula and was able to calculate option prices based on given data. By the time the exams came , we were relieved that we would never need to look at that formula ever again.

Now time has passed and the business of option pricing has become even more complex. Derivative software are now used which add even more levels to the formula and has generated a fry of new derivatives. 20 -30 years ago , politicians (including those working in the treasury dept) had no clue how it all works. Now , they have given up and leave it in the hands of the banks who also have no clue because it is only the physics guys who understand it.

In addition to Warren Mitchell's warnings many years ago, there is now a lot of talk on the internet about this imminent danger. This could be the biggest financial collapse the world has ever known - truly the biggest financial time bomb ever.

Can this be averted ? In my view it is in the lap of the gods , as they say. Those who write derivatives (or rather, provide real-time derivative software for banks and financial institutions ) have succeeded in being one-step ahead of every one. They always win since the risk is not theirs (they are just the software people ).

The government , whilst aware of the risks, has no clue how to reduce it . The banks do not seem to care. Can the savior be Quantum Mechnics which, after all , gave birth to this monster.

Is it a threat that everyone will brush aside simply because it is too complicated to understand ?

My view is that this is a wake up call to remind us that money is at one with universal laws and the concept of oneness and, unless we reconnect money to its divine and sacred source and reconfigure it into our consciousness, we will face a financial armagedon. If I can borrow from words already quoted by researchers : "we need to move towards a new money reality and a quantum economy"


edit on 2-1-2016 by crowdedskies because: (no reason given)




posted on Jan, 2 2016 @ 08:00 PM
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Is this serious, money has a divine source? Is that how you sleep at night, making up that crap? I have friends in their late 60's who can't retire because of the 2008 crash, so another one doesn't matter to them. We just need to grow lots of food and let the bank and finance cannibalize each other.



posted on Jan, 2 2016 @ 08:13 PM
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I remember seeing some graphs of city stock prices. The person had been collecting them as abstract artworks because the prices of junk stock were in sine waves, sawtooth waves, and all sorts of fancy staggered step patterns that made it hard to guess whether the price was going down or up. The most intricate looked like a sinewave sampled several times faster in frequency that the display software could handle. So it was alternating between going up, down and levelling out each step. Eventually these patterns seemed to disappear into background noise. I do wonder whether that was someone testing trading software like FTL Trading.

Faster-Than-Light trading moves so fast in nano-second time, that the average punter or even city stockbroker just couldn't keep up. It's like skimming off the energy of a raindrop in a swimming pool. They just send a PUT on stocks if they think they will rise, and CANCEL that order if they don't. All the skill of derivatives software goes into estimating which of the hundreds of thousands of stocks are going to rise in the next few nanoseconds, and which are going to fall, then putting bets on those that are going to rise the most first.

Now since every punter who wants to buy wants a lower price, and every punter who wants to sell wants a higher price, there's an equilibrium point where the differences between everyone's expectations is the lowest. If the trading software can calculate that point it can figure out what's a good deal. The latest trading systems even have software modules that perform Natural-Language-Processing on live stock report feeds, and do some word analysis to determine whether it's good
or bad news. They even use machine-learning to try and determine the algorithms used by the other traders. If they sell a teeny-tiny amount of stock, they might just trigger a big sell, in which they can buy up the stock at a bargain price, or maybe they can trigger a big buy, in which they can sell stock at a big profit.

It's almost like a financial version of Core Wars, with the winning score converted directly into money, and the game never finishes.

en.wikipedia.org...

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”
― Lewis Carroll, Alice in Wonderland



posted on Jan, 2 2016 @ 08:16 PM
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originally posted by: MOMof3
Is this serious, money has a divine source? Is that how you sleep at night, making up that crap? I have friends in their late 60's who can't retire because of the 2008 crash, so another one doesn't matter to them. We just need to grow lots of food and let the bank and finance cannibalize each other.


Hey, I feel the same as you do about what 's happened.

It is such a crime for me to look at the metaphysics behind it ? We need a new breed of politicians and bankers. We need to start somewhere . A fairer system must entail a rethink of the economy based on a different model. Luckily a lot of people are already looking at it and ,whether you like it or not, you will come across the word quantum economy as a solution for the future.



posted on Jan, 2 2016 @ 08:20 PM
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a reply to: stormcell

A brillant expose. But that was just the tip of the iceberg .



posted on Jan, 2 2016 @ 08:27 PM
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a reply to: crowdedskies

But the average Joe has no need to understand derivatives.

The only thing about derivatives that people need to understand is that it's just simply another form of "gambling on future 'what if' scenarios".

That's all.

If they understand that much, then they understand that it's yet another old boys' club scam/con game to line their own pockets with the little peoples' money.

Which simply means that when it all comes crashing down, the gamblers won't be paying for their losses, we will.

And we all got a nice little taste of that future fail scenario with the bailouts... but that was just a small taste.

They gambled and we bailed them out.

And guess what ?

They continue to gamble... in the exact same way... on the exact same game.



It doesn't take a PhD in economics to figure out what's coming down the pipeline.




posted on Jan, 2 2016 @ 08:35 PM
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yep, that's where I come in.......I'm trained by the Holy Spirit......cool huh

the options are used by the agriculture people saving corn in their silos till next year.....that's the only viable notion for options and futures are ok...but the etf's and derivatives are out of bounds.....we'll do something magnificent in the next years.......after the derivatives falter....it won't be pretty, the whole global country club will go down the tubes....I'm trying to see what then.....Holy Spirit says hold on till I come back for you.

edit on 2-1-2016 by GBP/JPY because: our new King.....He comes right after a nicely done fake one



edit.....did you know I trade by my wristwatch....told ya.....
edit on 2-1-2016 by GBP/JPY because: last minute thought there....yezz



posted on Jan, 2 2016 @ 08:37 PM
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originally posted by: CranialSponge
a reply to: crowdedskies

But the average Joe has no need to understand derivatives.

The only thing about derivatives that people need to understand is that it's just simply another form of "gambling on future 'what if' scenarios".

That's all.

If they understand that much, then they understand that it's yet another old boys' club scam/con game to line their own pockets with the little peoples' money.

Which simply means that when it all comes crashing down, the gamblers won't be paying for their losses, we will.

And we all got a nice little taste of that future fail scenario with the bailouts... but that was just a small taste.

They gambled and we bailed them out.

And guess what ?

They continue to gamble... in the exact same way... on the exact same game.



It doesn't take a PhD in economics to figure out what's coming down the pipeline.





If you keep this attitude then nothing happens. The old boys club carries on. We need to break the pattern . The only way to beat them is to join them and change it from the inside.



posted on Jan, 2 2016 @ 08:40 PM
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Most derivatives are hedging against losses.

The collapses happen when too many safeties are under-hedged and over-hedged.

That's what happened in 2008.

It's not really a gambling problem.

And it has nothing to do with who "can" and who "can't".




posted on Jan, 2 2016 @ 09:34 PM
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a reply to: crowdedskies




If you keep this attitude then nothing happens. The old boys club carries on. We need to break the pattern . The only way to beat them is to join them and change it from the inside.


I vehemently disagree.


The only way to beat them... is to beat them, literally.


With a baseball bat.

Or a crowbar.

Or a rolled up copy of the Glass-Steagall Act.


Whichever works.




posted on Jan, 2 2016 @ 10:02 PM
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originally posted by: CranialSponge

I vehemently disagree.


The only way to beat them... is to beat them, literally.


With a baseball bat.

Or a crowbar.

Or a rolled up copy of the Glass-Steagall Act.


Whichever works.



I like your style



posted on Jan, 2 2016 @ 10:50 PM
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It wouldn't surprise if banks today are facing imminent collapse from future bets on oil prices. They'd only own up to it after collapsing, not before.



posted on Jan, 3 2016 @ 12:23 AM
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originally posted by: glend
It wouldn't surprise if banks today are facing imminent collapse from future bets on oil prices. They'd only own up to it after collapsing, not before.


The future may not be so bleak.

Oils prices by themselves will not cause such collapse.

The derivatives monster must come under control before there can be a shift into an alternative form of economics - Quantum Economics. The principle of QE has been around for a while (since 1950s) but its implementation requires think tanks to be set up by the government first. The time is now ripe for this to be put on the agenda. Already, many scholars are coming forward, but sadly there is still resistance from those who prefer the traditional economics of Adam Smith, John Maynard Keynes and Milton Friedman)

I believe that Quantum Economics will deliver. It has the potential of eradicating poverty by aligning microeconomics (that of the man on the street and the small enterprise) to the macroeconomics (economics at national level). It also aligns with universal laws of Quantum Mechanics. Hence the reason I used the word sacred when referred to money in the OP - which may have upset some people.


edit on 3-1-2016 by crowdedskies because: (no reason given)



posted on Jan, 3 2016 @ 01:28 AM
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What the banks have now is solid and they can change the prices whenever there is a disaster. Trading can be infitely complicated to get an edge like quantum physics or it can be infinitely simple, like ONLY buying when it's cheap.

I feel a complicated trading model is only good for a massive amount of money under management. The more money your trading, the more accounts, the more moving parts. But for normal people with one account, it's all discipline to only buy cheap.

Finding value isn't hard either. Just wait until the overlying index breaks new lows for a multi year period and buy the stocks of companies with the most hard liquid assets. So yea, the markets aren't even hard if you can stay disciplined.

Also farmers worldwide use options and futures very well to help hedge the food everyone here is eating tonight. So I just don't see derivatives going away anytime soon. But they sure will move up and down lol

What's a derivative? It's a side bet. If the side bet wins, you can cash out.... or if you don't cash out.... you can play with the big boys and either win big, lose big, or break even (hedge).
edit on 3-1-2016 by tonycodes because: (no reason given)



posted on Jan, 3 2016 @ 02:12 AM
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a reply to: crowdedskies

Why? Why now?



posted on Jan, 3 2016 @ 02:13 AM
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a reply to: crowdedskies

The physics of Derivatives , the financial WMD - your mention of formulas suggests to me the book "Silent Weapons for Quiet Wars' really was written by those whom it was purported to have written it as it to contains economic models expressed as mathematical equations. Perhaps your on to something here.

Other than being a victim, is there anyway I can use this information?
thanks



posted on Jan, 3 2016 @ 05:56 AM
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originally posted by: crowdedskies

originally posted by: glend
It wouldn't surprise if banks today are facing imminent collapse from future bets on oil prices. They'd only own up to it after collapsing, not before.


I believe that Quantum Economics will deliver. It has the potential of eradicating poverty by aligning microeconomics (that of the man on the street and the small enterprise) to the macroeconomics (economics at national level). It also aligns with universal laws of Quantum Mechanics. Hence the reason I used the word sacred when referred to money in the OP - which may have upset some people.



I don't share your enthusiasm as the problem is not purely economic. If the recent growth in society resulted from cheap energy (oil as cheap as water) then society has to decline when that energy becomes more costly to deliver. Which results in a continuous roller coaster with worsening cycles.

1/improving economy uses more energy
2/energy becomes more expensive causing economy to decline
3/declining economy uses less energy
4/energy becomes cheaper allowing economy to improve
5/ go back to step 1.

A new world is coming if we like it or not.



posted on Jan, 3 2016 @ 06:54 AM
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a reply to: tonycodes

You are making a practical comment which I would go along with if we were only talking about derivatives . However, I am now shifting the attention to the last paragraph of the OPand ask people to consider Quantum Economics .



posted on Jan, 3 2016 @ 06:57 AM
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originally posted by: MOMof3
a reply to: crowdedskies

Why? Why now?



I do not understand what precisely you are referring to.

Are you saying : "why should we adopt a new economic model that can eradicate poverty ?"



posted on Jan, 3 2016 @ 07:13 AM
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originally posted by: Azureblue
a reply to: crowdedskies

The physics of Derivatives , the financial WMD - your mention of formulas suggests to me the book "Silent Weapons for Quiet Wars' really was written by those whom it was purported to have written it as it to contains economic models expressed as mathematical equations. Perhaps your on to something here.

Other than being a victim, is there anyway I can use this information?
thanks


Thank you for your comment.

Please can we all now move to the last copuple of paragraphs from the OP. Away from derivatives and onto Quantum Economics.

Google will not reveal much except the name of Bernard Schmitt (a frenchman , even though the name sounds a if german).

I do not know much about him, except that he appears to have intuited the workings of QM without going too much into physics. Probably the same way, I understand QM without a physics background.

In Quantum Mechanics, if you look for matter you may see either particles or waves. It depends on the observer. It disproves Newton's theory on matter.

In Quantum Economics , you apply this same duality to money. It is like saying one side of the coin shows its face value (eg a £1 coin or say a dollar bill) and the other side has whatever value you wish it to have. That gives it enormous possibilities and potential to create and generate far more than could ever be expected.

I will make all this clearer if people will start opening their minds. Googling this will probably not help; even Bernard Schmitt's theories are explained using different examples than I would use.
edit on 3-1-2016 by crowdedskies because: (no reason given)

edit on 3-1-2016 by crowdedskies because: (no reason given)




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