Ask HN: What good are exotic financial instruments?

1 points by crystalarchives 15 years ago | 1 comment

It seems that a lot of the reasons behind the economic issues that the United States and the rest of world has experienced is a result of exotic financial instruments created to increase complexity and thereby hide the underlying fundamental asset information. A side effect seems to be creating paper wealth that has absolutely no basis in reality, instilling a false sense of security of increasing gains until the scheme unravels.

As a result, I'm left to wonder why these instruments are not regulated in a manner similar to that of nuclear power plants, guns, or other such potentially dangerous inventions.

Is there a benefit that exotic financial instruments offer that I'm unaware of?

Otherwise, why is the US government not actively ensuring that these instruments are not allowed unless they are deemed to be a valuable financial tool?

The only reasons I can see are 1) Anyone with the domain knowledge to police these instruments are either in on the racket or get a cut for looking the other way. 2) There is actually a positive, valuable contribution that exotic financial instruments provide that I'm unaware of.

It seems that solving this problem would lead to some serious economic stability.

Any further insights would be much appreciated!

chollida1 15 years ago |

> Is there a benefit that exotic financial instruments offer that I'm unaware of?

They allow traders to trade otherwise untradable items. On the same token, they allow traders to hedge things that are otherwise un"hedgable".

It's important to remember that at it's base a financial instrument is just a legal agreement between two parties.

Some times there is an underlying item that it derives it's value from, in this case it's called a derivative.

Whether or not you consider this to be a benefit or not is up for debate:)

> Otherwise, why is the US government not actively ensuring that these instruments are not allowed unless they are deemed to be a valuable financial tool?

Once you understand this you start to understand why the government might not want to get involved. If these instruments are just legal agreements then how could the government get involved with out it getting messy.

After all how can the government say that you and I can't make a deal.

Under what terms can't we make a deal? What can't we trade? Is there a maximum value of a trade? Can I sell my part of the trade to someone else? etc...

As a side note, I make my living converting these legal agreements into models that can be priced.