Tuesday, May 04, 2010

Fantasticus the Wizard Explains Derivatives

Ta-Nehisi Coates on The Atlantic was asking people to explain derivatives in a way people could understand. Here's the beginning of my crack at it:
See this scrap of paper? It's not worth anything, right? Right. It's just a scrap of paper. But I'm a financial wizard. I'm going to cast a financial spell. I'm going write some magic words on the paper. Those words are:

"If the price of gold drops a lot, I, Fantasticus the Wizard, will pay the owner of this scrap of paper a bunch of money."

Using magic, I have just turned this useless scrap of paper into a derivative!

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