Some people will protect their investments using derivatives. A simple example would be buying stock options to protect a stock position you might have. If you have a ton of stock you can buy put options to protect against the downside. What happens in reality is people take on more risk because they believe they bought protection against that risk.

There is one thing that EVERYBODY overlooks. That one thing can bring down the entire system within one day. The one thing everybody overlooks is counter party risk.
What do you think will happen to the protective puts (or any other derivative) that are backed by a major bank if that bank goes under? If that bank goes under because of a system risk all other banks will follow. What do you think will happen with the entire market the moment the market realize that their protective derivatives are no longer assured?

Can we even begin to fathom what would happen in one day if derivatives counted in Quadrillion dollars are no longer counter party trusted?

Some people will protect their investments using derivatives. A simple example would be buying stock options to protect a stock position you might have. If you have a ton of stock you can buy put options to protect against the downside. What happens in reality is people take on more risk because they believe they bought protection against that risk.

There is one thing that EVERYBODY overlooks. That one thing can bring down the entire system within one day. The one thing everybody overlooks is counter party risk.
What do you think will happen to the protective puts (or any other derivative) that are backed by a major bank if that bank goes under? What do you think will happen with the entire market the moment the market realize that their protective derivatives are no longer assured?

Can we even begin to fathom what would happen in one day if derivatives counted in Quadrillion dollars are no longer counter party trusted?