In another brilliant move by the decisionmaking decisioners of the lofty halls of capital (you know, the folks that are so much smarter than the rest of us that they deserve bonuses that dwarf even the number of the eleventy-kajillion attendees at Fox enumerated Teabagger functions), they are apparently developing the greatest financial product of all time.
It might even replace all that time consuming Vegas travel and InTrade gamblers' tomb time. There can be new wings for mansions, minks for extra mistresses, 10 figure bonuses, and solid gold bathroom fixtures for the semiannually replaced private jets.
The good times will be here again, and what could possibly go wrong?
http://www.risk.net/...
Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs.
Like the untraded US rates liquidity index (USRLI), the CLX is constructed as a sum of the Sharpe ratio – deviations from the mean divided by volatility – of various market factors, such as equity volatilities, Treasury rates, swap spreads, corporate bond swaption-implied volatilities, and structured credit spreads. Citi will make the CLX tradable by using fixed historical values for the mean and volatility parameters, eliminating the need for costly recomputation from lengthy time series.
It sure beats the hell out of mundane things like taking modest profits out of making loans to small business to aid in the production of goods and services, or of assisting their smaller consumers in navigating these tough times while still earning a more modest interest rate. Plus, its a lot more fun to gamble if there aren't a bunch of beefy guys in ill-fitting suits having to play pit boss and cramping the style of gamblers, er, make that investors by commenting on whether a bet is too high or not. In this casino game, every bet is just fine, because the losses are rigged to be borne by others.
"The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don't worry about interest-rate exposures any more – they just pay a fee to hedge it," he says.
Like a swap, the contracts envisaged by Citi would be entered into without an up-front premium, with money changing hands according to the index's movements around a fair strike value.
Like I said - what could possibly go wrong?