It’s not very representative of reality to show derivatives by their “size and scope”. Most contracts are never exercised, and I suspect in order to come to the number they did they would have to consider all contracts as being exercised.
I for example might buy the right to buy 1 million pounds of apples at the current market price of 1.27 per pound until lets say Feb 2016, and lets say that right costed me $10,000 (expected rise in cost is 1c). Maybe I feed a lot of people and I’m trying to offset the risk of apples going up to 1.60 for unknown reasons. 99% of the time apples are not going to 1.60 all in one month, almost always I will not exercise this contract, so why are they treating it like I’m going to buy a million apples from the derivatives seller. It’s like saying the insurance company is going to have to pay for a new home for every single customer, of course the numbers are going to be laughably large, and fundamentally incorrect. Someone please correct me if I misunderstood this image.
It’s not very representative of reality to show derivatives by their “size and scope”. Most contracts are never exercised, and I suspect in order to come to the number they did they would have to consider all contracts as being exercised.
I for example might buy the right to buy 1 million pounds of apples at the current market price of 1.27 per pound until lets say Feb 2016, and lets say that right costed me $10,000 (expected rise in cost is 1c). Maybe I feed a lot of people and I’m trying to offset the risk of apples going up to 1.60 for unknown reasons. 99% of the time apples are not going to 1.60 all in one month, almost always I will not exercise this contract, so why are they treating it like I’m going to buy a million apples from the derivatives seller. It’s like saying the insurance company is going to have to pay for a new home for every single customer, of course the numbers are going to be laughably large, and fundamentally incorrect. Someone please correct me if I misunderstood this image.