Dwapara & Financial Derivatives

Derivatives are financial instruments whose value changes in response to the changes in underlying variables. The main types of derivatives are futures, forwards, options, and swaps although there are many far more exotic ones.

Derivatives are a characteristic of Dwapara Yuga, being less directly tied into the material world, opening up the creativity of financial engineering and conversely huge risk of losses if not used responsibly.

Some texts find the existence of derivative contracts in incidents in the Mahabharata, a previous higher Yuga.

Their use (and abuse) in Dwapara Yuga has exploded from simpler forms a century and a half ago (CBOT farm commodity futures) to ones dependent on the massive compute power that became available to even small trading desks from the 1980s onwards (Mortgage Backed Securities being the most obvious example).

They fueled the growth of 100s of hedge funds wherein a few individuals and small staffs could outplay large banks and governments, a financial equivalent of the dot com boom. Financial and software engineering, entrepreneurship, media, politics (when did you last see a poor politican?) and sports are the handful of fields where upside is shared, most businesses limit upside and share downside.

A derivative based on aggreggation of loans, for example, is basically dependent on the assumptions in the valuation mathematical model and the conforming nature of the loans. If the assumptions are wrong or the characteristics of the loans are not as expected, the value of the derivative can plummet spectacularly, as we are seeing in the current wave of bank and insurance collapses.

LTCM was the poster child of such collapses a decade ago. Nassim Taleb compared LTCM's strategies to "picking up pennies in front of a steamroller" balancing short term gains against potential catostrophic losses.

There is always a dynamic tension between heavily regulated and conservative regimes such as France where defaults are rarer yet for example, home ownership is out of reach for a huge percentage of the population and little regulated and liberal regimes in the US where defaults are currently commonplace yet home ownership is essentially open to all.

Underlaying these financial mechanisms are motives - greed breeds its own karma as does thoughtful service, determining long term results.

Jimmy Wales, speculating on the CBOT, was able to retire and fund Wikipedia a project characteristic of Dwapara Yuga since its content relies on the general public rather than a narrow elite of academics with their limited focus areas and peer pressures to conformity. In independent analysis, Wikipedia has proved not only to have wider, more recent coverage than Britannica and Encarta but also to be more accurate even in the most arcane academic areas. The book the wisdom of crowds expands on these ideas.