Wednesday, May 7, 2008

Derivatives Derived

Here is my submission to John August's latest challenge, in which participants must write a scene in which someone explains (financial) derivatives. The version here fixes a subtle malapropism which, if John is on the ball, should cause him to go "that doesn't quite make sense, he meant xxx" for one of the lines. However, I'm not going to point out which word it is -- I'll let you find it. It actually makes some sense in the erroneous version -- it just makes sensible sense in the corrected version.

If some of the dialog seems familiar, but you don't get the reference -- it's an homage to an awesome scene from Sidney Lumet's Network (script by Paddy Chayefsky). I also make mention the other meaning of derivative, which is often used when doing analysis to decide what derivative positions to take. And, by being an homage, the scene itself is derivative. Perhaps John will award extra points for scoring a triple entendre.

JENKINS, a stuffed suit executive munching a Cuban cigar, leans forward. He bellows out a cloud of smoke from his yellow grin. It engulfs the thin, bookish MAX. Jenkins gesticulates with his cigar like an orchestra conductor, pushing Max farther back into his chair with each sweeping gesture.

Your pointless pontifications on pricing parameters and rates of change and rates of change of rates of change are boring me, Max. Buy low, sell high. It's simple, Max. Even a genius like you can see that, no?

But, Mr. Jenkins, we can't just --

Come now, Max. It's like the man once said. There is only one holistic system of systems, one vast and immane, interwoven, interacting, multi-variate, multi-national dominion of dollars. It is the international system of currency that determines the totality of life on this planet! The world is a college of corporations, inexorably determined by the by-laws of business. That is the natural order of things today! Am I getting through --

Max's chair crashes to the ground as he jumps up. He grabs Jenkins' arm in mid-swing. Plucks the cigar from his hand.

You foolish old fossil!

As Max rants he shoves the cigar an inch closer to Jenkins' nose with each outburst.

Don't you understand? There is no IBM or ITT or AT&T, no DuPont, Dow, Union Carbide or Exxon. There are only equities and commodoties, rates and trends, arbitrage and triage, speculation and hedging, OTCs and ETCs. The future is forwards, the forwards, our future! You think your cozy little world of petro-dollars and electro-dollars and multi-dollars is what George Soros talks about in his board meetings? You stand here and howl about dollars and cents. There are no dollars and cents. Dollars and cents are but a dot on a chart, a moment in time, the input to the next output, the second when the future becomes the present, before it becomes the future again! And with leverage, we always live in the future. You're reading a dysfunctional function. Look deeper. Can't you see it, Jenkins? The future? -- Is knowing the future! The almighty dollar is dead. There are only arbitrage positions and speculation markets, equity swaps and back-to-backs, forward rate agreements and interest rate caps, swaptions and options and futures and turbo warrants. Long-term positions? Profitability? And, for Heaven's sake -- dividends? Yesterday's news, Jenkins. There are no more straight bets, no more original positions. No, Jenkins. Everything is derivative now.

The cigar is almost touching Jenkins' nose. He nervously pushes it aside.

What does it mean, Max?

Your future has no options, Jenkins. I'm shorting you.

Max stuffs the cigar into Jenkins' suit pocket. Struts out the door.