[FoRK] August 2007 Update of The Second Great Depression

Lion Kimbro <lionkimbro at gmail.com> on Wed Aug 1 19:01:08 PDT 2007

On 8/1/07, Adam L Beberg <beberg at mithral.com> wrote:
> >   Waaaiiit-a-second here, ...
> >   Is that really **true?**
> >   Are you sure?
>
> Yes. http://en.wikipedia.org/wiki/Retail_forex
>
> "While up to 4:1 leverage is available in equities and 20:1 in Futures,
> it is common to have 100:1 leverage in currencies; some forex market
> makers offer up to 400:1".
> http://www.google.com/search?q=forex+%2B400%3A1

  Well, I appreciate your telling me about something that I didn't know.


  My wondering is now:

  * Is it possible that the leverage is so high, because expected
    changes are so small?

  Take an extreme case, and envision "widgets"--
  In 1,000 years, they change in value +-1%.
  In 1 year, they change in value... +-.001%.

  Now, you buy $100 worth of widget, and then leverage that
  out to $10,000 worth of widget.  (100x!)

  And then you wait a year.

  Buuuut, ...  ... it was a bad year.
  Turns out, widgets went DOWN in value: -.001%.
  Your widgets are now only worth: $9,999!
  You're out, ... $10!

  So, it would make sense to me that the amount of leverage
  allowed has something to do with the expected change
  in value.

  I have heard that people who invest in currencies are considered
  "conservative," because currencies tend to change in value slowly
  over time.  So, perhaps that justifies higher leverage?


  Further, in that Wikipedia article you cited, it further reads:

  "In the typical 100:1 scenario, the client absorbs all risks
associated with controlling a position 100 times the capital they are
putting up, and, given that the money is only being used for currency
exchange and on the market makers' books, the transaction can
proceed."

  I don't know what that means, "client absorbs all risks
  associated," but I wonder if that means you have to have some
  extra cash on hand available, beyond just the leveraged cash,
  or if they're going to eat you out with a spoon if you lose, or *what.*

  But I wonder if, whatever it is, it serves to reduce the overall
  risk to society should their wild adventures fail?


  Neither economist nor skilled trader,
  but always interested to learn about these things,

    Lion, the knowingly irrational.  =^_^=

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