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DERIVATIVES: FOR FUN AND .... ?

First, what IS a "derivative?"
Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying on which a derivative is based can be an asset (e.g., commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) — see inflation derivatives), or other items (e.g., weather conditions, or other derivatives). Credit derivatives are based on loans, bonds or other forms of credit. (Wikipedia, Finance)

Okay, now onto my, Mad Hatter, Derivative Hall of Fame Winners:

Would you invest in something with a name that reminds you of what won't go down no matter how many times you flush? If so here's your derivative:

The Reverse Floater:
A derivative whose coupon rate is inversely related to some multiple of a specified market rate of interest. As interest rates go down, the amount of interest the inverse floater pays goes up. For example, if the inverse floater rate is 32% and the multiple is four times the London Interbank Offered Rate (LIBOR) of 7%, the coupon is valued at 4%. If the LIBOR goes to 6%, the new coupon is 8%. Many inverse floaters are based on pieces of mortgage-backed securities such as Collateralized Mortgage Obligations which react inversely to movements in interest rates.

If you get your kicks betting on human misery, here's the one for you:

The Catastrophe Bond
A Bond that promises a coupon (and principal, in some cases) that starts out high, but drops after a suitable catastrophe occurs. A suitable catastrophe might be an earthquake or hurricane of sufficient magnitude and within a particular region.

And, for you animal lovers:
The Hamster Option
A form of Range Option that SBC created. I can describe it no better than Professor S. Trautmann explained it to me: "The German noun Hamster has the same meaning as the English noun hamster: it is the name of a small rodent. But HAMSTER is also a acronym standing for Hoffnung Auf MarktSTabilitaet in Einer Range (literally: Hope on market stability in a given range). It really is a pun as in German the verb 'hamstern' has the meaning of 'to hoard'. HAMSTER options hoard the fixed amount one gets for every day the underlying stays in the prespecified range. What is earned cannot be lost anymore."

Here's Joe the Plumber's favorite:

The Kitchen Sink Bond
A bond or CMO (collateralized mortgage obligation) into which issuers have dumped "everything but the kitchen sink," including "garbage" such as miscellaneous MBSs, CMO tranches, and derivatives. Some people call the contents of the KSB the "toxic waste" of derivatives transactions.

Here's one for the beastiality inclined investor

The Naked Dog Basket
The "Basket" is a portfolio of Brady Bonds that someone issued in exchange for rescheduled debt of certain developing countries. One might suppose that some people consider such a bond to be a "Dog". The "Dog Basket" is "Naked", because the terms of the contract call for stripping the yield on U.S. long bond from the gross return on the portfolio. (Described in the Financial Times, 11/16/94, p. V.)


And you wonder why we're at the doorstep of depression.


A full list of derivative definitions can be found here: http://www.geocities.com/nvithalani/derivatives.html
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