The Spider Network

you wanted to buy ten gold bars, that was straightforward; if you wanted to place a bet that nine months from now the price difference between ten gold bars and fifty bushels of wheat would be twice the difference between five bushels of wheat and sixteen widgets, then you were playing with derivatives.

Zombanakis came up with a novel idea. What if the banks that were part of the Shah’s loan syndicate regularly reported what it cost them to borrow money? Those figures could be averaged out and, every few months, the interest rate on the Shah’s loan could be adjusted to reflect the changes in the banks’ average funding costs. That would insulate individual banks from the risks of a loan becoming unprofitable due to changes in interest rates.

oney was tight. Once, before his parents divorced, angry debt collectors showed up at their small, two-floor brick house in Shepherd’s Bush after Nick, a ponytailed television journalist, fell behind on the utility bills. Hayes told himself that when he grew up, he’d make enough to ensure that the bailiffs never returned. Every day, he counted his money, which he had earned doing odd jobs around the neighborhood. He stacked the coins by denomination. He memorized the quantities. The rituals made him feel safe. He started carting around all his essential belongings in his backpack, as if ready to flee if the need suddenly arrived.

how much risk he had on—in other words, the total amount he stood to gain or lose depending on the outcome of all his bets

Its concern was that Libor was too high; banks seemed to be reporting data that overstated their borrowing costs

interest-rate swap

Boiled down to their essence, derivatives were designed to help people or institutions protect themselves from future circumstances

The famous Dutch tulip bubble largely involved the frenzied trading of options to buy or sell the bulbs

What you were buying or selling was not the thing itself (widgets, bushels, gold bars) but something related to that thing, maybe its future value, or how it compared to something totally different

long as he was holding on to the securities, the market maker also needed to make sure that the bonds weren’t vulnerable to big swings in value. One way to accomplish that was to buy instruments whose values were likely to move in the opposite direction of the original Mexican bonds—such as a type of insurance contract that gained in value as the risk of the Mexican bonds defaulting rose