Good day,

I feel this attack on derivatives is ill-suited for the CFA publication.

I would like to point out the number that is chronically misused is the Notional Value of Outstanding OTC Derivatives as published by the Bank of International Settlements. The number when taken out of context can give a very skewed picture of reality. It is a well-established empirical fact (possibly also reported by BIS) that that swaps (especially interest rate swaps) take up the largest proportion of all derivative contracts. Swap contracts are always quoted and priced in term of “notional” amounts. For example a very regular swap that a medium size corporation may use, would have a “notional” amount of $100 million. The contract itself would involve swapping a fixed rate of interest (for example 5% per annum) for a floating rate (for example a rate fluctuating between 4.5 % and 5.5% per annum). The actual annual obligation of the swap parties will never exceed $500 000. So when one quotes the Notional Value of Outstanding OTC Derivatives one may get an increase of 200 fold of the true obligation. Obviously large multinationals (and there are at least 500 of them) may be using swaps with notional amounts going into billions of dollars, which together with double counting which is notoriously hard to avoid piles up to a ridiculous amount of $700 trillion. But the amount itself is absolutely devoid of any meaning. It is the same as me saying that I weight 1 million CFAgrams. Until I define CFAgrams it is impossible for anyone to tell whether I am really heavy or not.

Often attacks on derivatives stem from ignorance and are confined to popular press and election speeches; it is thus surprising to see such weak analysis from such a qualified author.

Valeri