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May 09 2008

Screenwriter John August writes Angel. Lilah Morgan explains derivatives to the gang.

Link to the original blog post: A somewhat derivative challenge.

John August challenges his readers/writers to write an expository scene in which one character explains the concept of derivatives to another. Later, he offers an example using the Angel characters.

Finance geekery combined with Angel characters. Fabulous!
Wow, he's got the Angel style down, I'd say - really well done.

"Derivatives" made me think of chemistry class - and how that was always the class I skipped. Well, that and calculus. Well, maybe a few others, too.

"Cover our assets" - hee. Always makes me giggle.
That was brilliant! And I think that truly does explain W&H's plan for Angel - if he stays good, they gain; if he goes bad, they still gain. It's the missing piece of the puzzle!
That was pure delight.
"Two hundred years on Earth and not one business class."

That's a great scene. It was so perfectly in style and character, it made me think I was watching an episode. Where was he when Angel was on the air? Can we get Joss to hire him for Dollhouse?

Of course, I'm still not real clear on what derivatives are.
Whoa, that was excellent. Breathtaking, actually.
That was a great exposition scene, and also very consistent with the characters.
"Like an evil corporate flute?"

Beautiful.
Wow, that was spot on. I could hear all their voices in my head while reading it, haha. Clever idea.
That was good, and an interesting blog, too. I can't get my work done when you people link to things like this!
Hehe, I read Lilah Morgan and instantly thought of Dexter. I had to look over it a couple more times to realise what was actually meant.

That probably makes me a bad person.
Ah Lilah, you have been sorely missed from my tv screen.

- And if our assets are not protected heads will roll, mine if I shake it to hard, someone elses if I get there first.

Talking about loose heads, I'd have loved a Deadwood one where Al explains derivatives to the Chiefs head, expletives included of course.
Very clever dialog and I could hear Lilah too -- my favorite character from Angel.

barboo: derivatives are the magic multipliers that will take down the world economic grid. They leverage microgreed into megacatastrophe. Wolfram & Hart lives!
Uh, yeah, thanks for the clarity on that, doghouse.
:)
I don't know what they are either.
They are insurance or hedges on an investment. If your investment increases in value then you are out the cost of the derivative, but you still have a net gain. If your investment decreases in value then your derivative protects you on the downside.
"Insurance" is supposed to make it sound less sinister, TamaraC? "Take down the economic grid" - I think that's a bit too far in the other direction. But derivatives markets are poorly regulated, unstable, and can be shown to have at least magnified the destructive results of natural disasters and economic downturns, if not exactly caused their own, yet. Happy playgrounds for W&H indeed, and those guys from that strike video Joss posted who were having sex with endangered pelts.
A derivative can be many things and are not solely defined by what is traded by Wall Street. Insurance is a concept that people understand. I was explaining what a derivative is, dreamlogic. I wasn't telling people to run out and buy them. Your bias is a little knee jerk today, isn't it?
Seriously (for a moment), there's interesting stuff on the whip-saw effect of derivatives in the failure of Long-Term Capital Management -- start with the Wikipedia entry, then go to the book they cite.

But I like John August's Lilah explanation better.
My bias? TamaraC, I'm sure that we can agree that financial risk is symmetrical upside/downside, in a free market, pure hedging only limits the range of risk, and by your description hedge funds are pure hedging. Which would tend to be stabilizing rather than otherwise. So what's up with the real world fallout from them? Teach us, Professor T.
Boy, Lilah's dead and she's still able to create strife!
I was talking about hedging using derivatives, not hedge funds which is a whole different ball of wax. Nor was I talking about real world which is hella more complicated. I was talking about the definitions of derivatives. You are the one deciding that a definition of a financial construct is evil. I'm just defining it not defending it.
Oh, I'm really confused, then. Hedge funds aren't composed of derivatives. They're something entirely different.
Hedge funds do not contain only derivatives and are composed of other financial instruments as well such as bonds and stocks. They also only use certain types of derivatives on certain types of instruments. A fund is an amalgamation of different things and there is no simple answer or definition since every specific fund is composed of different things to serve a different purpose or goal. Sorry, there is no black and white here. Hedge funds have been abused and manipulated to bad ends, but then so have many other things. meh.
I liked the story. Then I started reading the comments. Now my head hurts.
Don't know much about this but isn't a "hedge fund" basically just a way of investing in a variety of "stuff" such that if one bit of "stuff" goes down in value, other bits will tend to go up to at least partially balance your losses (as in the "hedge your bets" sense) ? So surely a hedge fund can be composed of derivatives, since derivatives can be traded the same as anything else (my old boss used to be a futures trader for instance) ?

It's kind of like betting mainly on red but also a smaller amount on black so that you won't lose the farm if you're wrong (assuming it doesn't come up green of course ;).

Nice scene, really gets the voices. Sort of reminds me of Twoflower explaining "insurance" to Rincewind (and, more fatally, the landlord of the Broken Drum ;) in the Discworld books.
Saje, you are thinking of a mutual fund which hedges risk by simply diversifying.
Ooh, all this grownup money talk makes my head hurt! No wonder it was Lilah who knew all of this stuff. After all, radix malorum est cupiditas.

I quite liked the scene, thought it captured the tone of the show very well. Now, if we could just get Simon Tam to explain something like this to Jayne...
Hang on, Michael Douglas told me greed was good BandofBuggered, are you calling him a liar ?

Saje, you are thinking of a mutual fund which hedges risk by simply diversifying.

Yeah I was but reading the Wikipedia article (among other googlable places) it sounds like a hedge fund is sort of a more complicated, less accountable specific instance of the class "mutual fund" for a select group of investors. Or was originally, now rather than reduce risk people sometimes use them to increase return (which is more or less just the other side of the same coin).

As their name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling. However, the term "hedge fund" has come in modern parlance to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase risk, and therefore return, rather than reduce it.

Seems to be the "select group" aspect that causes the trouble. 'Twas ever thus ;).
You are right, Saje. Hedge funds are complicated little beasties and can be used in several different ways. They do not have to be made up of only derivative instruments, however.

All of this is a long way aways from just defining a financial derivative.
They do not have to be made up of only derivative instruments, however.

That's correct, never claimed they did ;).

All of this is a long way aways from just defining a financial derivative.

OK here goes nothing (probably literally ;) - a derivative is kind of an abstraction of value, it's like the "idea" of the value of something, a meta-comment on its worth (in that sense I disagree with John August cos as I understand it it actually is quite a lot like a derivative in calculus. In the same way that acceleration is a derivative of velocity i.e. dependent on its value while also being one layer more abstract, a representation of a meta property of velocity so is, for instance, a future dependent on the value of bananas while also being an abstract representation of what the value of bananas means to the buyer and seller).

So a future would be like if you buy a $1 million lottery ticket and someone signed a contract with you to buy it for $20 after the draw then the contract would be the derivative (the "idea" of the value of the ticket) and the ticket would be the asset (the "something"). Clearly if it turns out to be a losing ticket then the contract is worth -$20 to the buyer (and +$20 to you) but if it's a winner then the contract is suddenly worth $999,980 to the buyer (and effectively minus that amount to you). Derivatives trading is buying and selling the contract before the draw and hedge funds, happening behind closed doors, can be a problem because no-one's really sure if one party knows the winning lottery numbers ahead of time ;).

Or maybe that's bollocks (luckily i'm not rich enough to have to worry about it ... Hey, wait a minute ... ;).
Good metaphor, Saje.
By george I think i've got it ! Ta, good to hear some of the gibberings weren't entirely gibberish ;).

Right i'm off to plunk down my life savings on frozen concentrated orange juice futures, this stock market lark is dead easy. What could possibly go wrong ?
Sage and TamaraC, you're both way smarter about this than I am and thanks for the insight.

The problem I see with derivatives is their vast multiplier effect. Nessim Talib wrote (about the implosion of Long-Term Capital Management ten years ago) that making money off derivatives was like picking up pennies in front of a steam-roller. The danger to the economic grid is that huge leverage like this can turn a series of small bad bets into a gigantic, house-of-cards collapse.

Now back to our regularly scheduled (Buffy) program.
doghouse, if any type of financial instrument is handled/traded/mismanaged in a risky manner, well that increases the risk now doesn't it?
Oh, I was going to let it go, but that last comment - I can't. Some financial instruments are created specifically to escape the purview of the authorities that are supposed to work for the people. That's not neutral. That would include a lot of the hedge funds. The "mismanagement" is intentional, and intended to distort markets to limit downside risk to certain investors, and screw everybody else. This last time, the U.S. bailed out the speculators, so the downside risk went to us taxpayers. How is their risk sticking to them, then, TC?
dreamlogic, you have made your political views very evident on this site. I am not engaging you on the reform that may or may not be necessary on the financial markets on whedonesque. It is not the place. Please stop trying to bait me. You would be shocked to learn that we probably agree on most issues.
So this is whats up next after the real estate bubble? It can't end well!
TamaraC, can you see how after what had been said before, and considering where we are, I thought you were baiting me with the "financial instruments are neutral" stuff? I won't preach against you here if you don't preach here.

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