CFDs, Junk Bonds and Derivatives

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mathepac

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Moderator's note: I have moved these posts from the Seán Quinn thread

Gordon Gekko said:
a) They facilitated anonymity - It wasn’t obvious that he was buying the shares.
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He wasn't buying shares. Had he bought shares, the catastrophe might have been avoided. He was trading in derivatives, better known as junk bonds, which have no assets backing them. It is a gamble that an asset, currency, share, or other tangible will change in value at some future date, either up or down. The bettors never own the asset(s), they are simply gambling on the value of the asset in the future.

A CFD is a bet on the value of the underlyings in the future. Underlyings are real things, CFDs and other junk bonds are bets on the values of underlyings, the ultimate problem gambler's/thrill seeker's high.
 
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mathepac said:
He wasn't buying shares. Had he bought shares, the catastrophe might have been avoided. He was trading in derivatives, better known as junk bonds, which have no assets backing them. It is a gamble that an asset, currency, share, or other tangible will change in value at some future date, either up or down. The bettors never own the asset(s), they are simply gambling on the value of the asset in the future.

A CFD is a bet on the value of the underlyings in the future. Underlyings are real things, CFDs and other junk bonds are bets on the values of underlyings, the ultimate problem gambler's/thrill seeker's high.
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Thanks for “correcting” what didn’t need to be corrected. My point was that CFDs were advantageous because otherwise people could see that he was buying the shares.

Most of what you’ve written is completely wrong.
 
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Gordon Gekko said:
Thanks for “correcting” what didn’t need to be corrected. My point was that CFDs were advantageous because otherwise people could see that he was buying the shares.

Most of what you’ve written is completely wrong.
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Which parts?

A contract for difference (CFD) is a popular form of derivative trading. Check​
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CFDs are not shares. Check​
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CFDs are derivatives. Check​
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To trade in CFDs you don't need to own any shares, even those identified in the CFD. Check.​
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CFDs have the same face value as a betting slip until the race is run and the winner and losers are declared. Check​
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Investors can use CFDs to make bets about whether or not the price of the underlying currency, precious metal, commodity, other asset, or security will rise or fall. Check​
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CFDs have no intrinsic value. Check​
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CFDs are junk bonds. Check​

Where then and how did my original post go so very wrong, pray tell?
 
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mathepac said:
Which parts?

A contract for difference (CFD) is a popular form of derivative trading. Check​
​
CFDs are not shares. Check​
​
CFDs are derivatives. Check​
​
To trade in CFDs you don't need to own any shares, even those identified in the CFD. Check.​
​
CFDs have the same face value as a betting slip until the race is run and the winner and losers are declared. Check​
​
A contract for difference (CFD) is a popular form of derivative trading. Check.​
​
Investors can use CFDs to make bets about whether or not the price of the underlying currency, precious metal, commodity, other asset, or security will rise or fall. Check​
​
CFDs have no intrinsic value. Check​
​
CFDs are junk bonds. Check​

Where then and how did my original post go so very wrong, pray tell?
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a cfd isn’t a junk bond , or any kind of bond.

And the the other poster was correct you didn’t correct anything he said.
 
Blackrock1 said:
a cfd isn’t a junk bond , or any kind of bond.

And the the other poster was correct you didn’t correct anything he said.
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"Junk bond" is a generic term for all derivatives, instruments with no intrinsic value outside of the wishful thinking and star-gazing activities of their creators, holders, and traders.

He didn't say specifically what I had said that was wrong other than the generic "Most of what you’ve written is completely wrong."
 
mathepac said:
"Junk bond" is a generic term for all derivatives, instruments with no intrinsic value outside of the wishful thinking and star-gazing activities of their creators, holders, and traders.

He didn't say specifically what I had said that was wrong other than the generic "Most of what you’ve written is completely wrong."
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CFDs are not "bonds"; end of. If by "generically" they are junk, you mean colloquially, you are merely observing a knee jerk judgement of the ignorant. Many derivatives are far from junk. The intrinsic value of a CFD is its current value relative to the market and indeed is what it could be closed out at (unlike a betting slip), albeit that could be negative.
Anyway "junk bonds" is not in fact a colloquial term, it is a technical term which has been given above.
 
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A junk bond isn’t a derivative. It’s just a bond that’s more likely to default / higher risk / not investment grade.

Even the term derivative is instructive. At its simplest it’s something that derives its value from something else.

I simply made the obvious point that CFDs enabled SQ to get a lot of leverage and to keep the position confidential, which triggered a bizarre post about junk bonds and SQ not owning the shares. I’m well aware that he didn’t own the shares (at least initially until the bank intervened, Maple 10, etc).

Leverage really is so dangerous. Lodge €100m with a provider. Take a €2bn position on something like Apple. Share price falls by 5%. Your €100m is gone.
 
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mathepac said:
He wasn't buying shares, he was gambling on derivatives.
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You don’t seem to understand this at all.

Sean Quinn thought that the value of Anglo Irish Bank was going to increase.

He wasn’t ‘gambling on derivatives’. He was EFFECTIVELY buying Anglo shares and borrowing to do using Contracts for Difference.

This had some advantages: No stamp duty, CGT treatment, anonymity, and not having to front all of the money.
 
Gordon Gekko said:
You don’t seem to understand this at all.
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Oh but I do!
Gordon Gekko said:
Sean Quinn thought that the value of Anglo Irish Bank was going to increase.
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So he gambled on the future value of some tangible assets he didn't own using CFDs, which are derivatives.
Gordon Gekko said:
He was EFFECTIVELY buying Anglo shares and borrowing to do using Contracts for Difference.
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What's the difference between buying and EFFECTiVELY buying? Either he and his family bought the shares or he (and his family) didn't.
Gordon Gekko said:
This had some advantages: No stamp duty, CGT treatment, anonymity, and not having to front all of the money.
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Until it came time to pay the piper and repay the loans for the CFDs, and the bill for the losses on the CFDs themselves, using the only assets he had which were Anglo shares, which Anglo couldn't afford to release to the market, as those sales devalued the whole kit and caboodle and Uncle Tom Cobley and all.

Simplez.
 
mathepac said:
Oh but I do!

So he gambled on the future value of some tangible assets he didn't own using CFDs, which are derivatives.

What's the difference between buying and EFFECTiVELY buying? Either he and his family bought the shares or he (and his family) didn't.

Until it came time to pay the piper and repay the loans for the CFDs, and the bill for the losses on the CFDs themselves, using the only assets he had which were Anglo shares, which Anglo couldn't afford to release to the market, as those sales devalued the whole kit and caboodle and Uncle Tom Cobley and all.

Simplez.
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You don’t even seem to understand the meaning of the word “effectively”.

Let’s say someone is ‘long’ Anglo through a CFD with no leverage (i.e. the value of the position is fully funded).

I don’t think it’s a massive leap to say that the person EFFECTIVELY owns the shares.

The characteristics of the derivative make it close to owning the shares.

Why would you do it? To be able to use leverage, to avoid stamp duty, and possibly to remain under the radar. Although the position was so big, it was known about by some.
 
Gordon Gekko said:
You still don’t get it.

Astonishing.
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I'm using your definition so I'm not surprised you're astonished at my apparent lack of getting it. So maybe I EFFECTIVELY get it, like the guy who EFFECTIVELY owns the shares by not buying them and investing in a derivative instead.
 
You said “CFDs are better known as junk bonds”. Nothing EFFECTIVELY about it. You just don’t know what you are talking about as several posters have pointed out. Wo/Man up.
Do you realise that the derivatives market is hugely bigger than the spot market? Our economy depends on it from importers/exporters hedging currency risk to airlines hedging oil risks to commodity traders hedging price risks etc. etc. Tell these people their hedges have no intrinsic value. You have spouted an ignorant “derivatives are gambling” mantra worthy of Boyd Barret.
 
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