Today’s Podcast

The word “derivative” sprung up on Delancey Place last week. Delancey Place is a brief daily email with an interesting excerpt or quote from a book or magazine article. Reading it is a favorite daily ritual. I am constantly impressed with the quality and diversity of the excerpts. I strongly recommend subscribing. It is free and now available as an poorly publicized but full text RSS feed. You can subscribe at DelanceyPlace.com.

The word derivative can be found in many contexts and it is both a noun and an adjective. Generally it describes anything derived from, formed from or reminiscent of something else. For example penicillin, email and Hip Hop are derivatives. Penicillin is derived from mold. The term email is a portmantae derived from the words mail and electronic. Some, including Guy Davis, might say Hip Hop and Rap are derivatives of the Blues.

Mathematicians and financiers also use derivatives. According to Wolframs’s Mathworld a, “derivative of a function represents an infinitesimal change in the function with respect to whatever parameters it may have.” Wikipedia explains a mathematical derivative as, “the [instantaneous] rate of change of a quantity”. I recall that derivatives and their analogs, integrations, were the heart of undergraduate calculus. I wish my math skills were strong enough to explain that to you. Alas, I must refer you back to Wolframs’ Mathworld and Wikipedia.

As for financial derivatives, I can describe them a little better. A financial derivative is an investment or contract that derives its value from an asset. Thanks to Hillary Clinton, the most well known derivatives are probably futures. A future is a promise to buy or sell an asset on a future date for a specified price. Today, you can buy a December 2012 Crude Oil (Light) contract on the NYMEX for about $63.50. If I bought this contract today come December 2012 the seller of the contract would deliver the oil to me. Conversely I could sell the December 2012 today for about the same price. Come December 2012 I would have to deliver the oil to the buyer. In both cases the contract derives its value from the future value of the asset.

Financial derivatives are most comonly used to hedge against risk. For example a farmer could sell a September corn future today to shield himself from risk the price of corn may fall. This type of derivative can be very helpful to farmers and other commodity producers. They plant the corn today, they sell it today and they get paid today. Come September they deliver the corn. Any risk of the price of the corn crashing is borne by the person who bought the corn derivative contract, not the farmer.

In practice though the futures markets and derivative markets are used primarily by speculators. Very few investors actually take delivery or deliver the underlying asset. More frequently they buy the derivative and then sell it before it comes due. Well as long as they can find a buyer.And this brings us back to the Delancey Place excerpt. The corn and crude oil futures I mentioned earlier are exchange traded, i.e., there are central organizations that standardize the derivatives for sale and help buyers and sellers find each other. This Wall Street Journal excerpt contrasts the exchanged-traded market and the over-the-counter (”OTC”) market:

…The over-the-counter market is far larger than the exchange-traded ones. Derivatives traded in this market had a total face value of about $285 trillion at the end of 2005, up from about $94 trillion five years before, according to the Bank for International Settlements, an association of international banks based in Switzerland…In comparison, exchange- traded derivatives had a total face value of about $58 trillion at year-end, according to the bank group.”

These over-the-counter derivative are traded directly between two parties. This is a little scary because the investments are not very liquid. It isn’t too tough to find someone willing to buy corn or oil futures. Maybe not at the price you want, but you can almost certainly liquidate or sell your contracts. OTC derivatives on the other hand are often described as exotic and are specific to the buyer and seller. With a market of only one buyer or seller, an exotic derivative can be very hard to sell. Combine this with the tendency for derivative traders to borrow heavily to buy the derivatives and you have a rather volatile financial situation and hence an issue worth Wall Street Journal and Delancey Place coverage. If you would like to try your hand at derivatives trading without risking too much, check out InTrade.com. On InTrade.com you can buy and sell derivatives of baseball, football, World Cup games and political events including a US/Israeli Overt Air Strike against Iran by December 2007 (pictured right).Now if you don’t care for the nuances of financial instruments fret not, Delancey Place doesn’t typically excerpt from such opaque and technical subjects.

Download the Derivative Podcast

Today I would like to honor fathers and especially my father, Keith, with a quote from Mark Twain:

When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished at how much he had learned in seven years.

I love this quote because it captures the feelings I think most sons have about their fathers. During adolescence we tend to think our father don’t really know what they are talking about and certainly they don’t know what is best for us. After a few years we realize how much our father’s do know and how prescient was their earlier advice.

Now this doesn’t quite apply to my relationship with my father. As I grow older my respect and love for my father’s advice grows and as an adolescent, I didn’t always give his advice the weight it deserved. But, and this is where the quote doens’t apply to our relationship, I have always known and respected his broad, worldly and practical knowledge.

Happy Father’s Day Dad! Thanks for all your love, support and wisdom.

Love
Scott
Download the Happy Father’s Day Podcast

I cannot apologize enough for the dearth of recent posts.

Today I came across an interesting word in an editorial by Cory Doctorow at the New York Times. Cory’s editorial draws our attention to cheap programmable microchips that allow nearly anybody with an idea for a simple electronic device, say a whimsical watch or a feral robot dog, to produce one cheaply and in their own home.

The word is trefoil. Trefoil is a noun. A trefoil is any three leafed symbol. The best known trefoil is the international symbol for radiation. This is the trefoil Cory mentions in his editorial. He describes a watch he picked up in Japan that

Appears to be warning of imminent nuclear catastrophe, with a radiation trefoil that lights up to tell me that I need to add six to the number of hours in the throbbing bar on the right side.

Trefoil or “tree-foil,” it can prounced either way, comes from the latin Tre meaning three and folium meaning leaf. Which reminds me an alternate meaning of trefoil is any plant from the genera Trifolium. Obviously these plants are named for their trifoliate leafs.

Radiation trefoil image courtesy of beigephotos at flickr.com.

NYTimes article via BoingBoing

Technorati Tags: beigephotos, doctorow, boingboing, Radiation, feral robot dog, trefoil

Play Over at Boing Boing, I came across a link to some great poems on the idiosyncracies of spelling and pronounciation in the English language. They don’t make for a great podcast. The joy is in reading them.

Here is my favorite:

WHY ENGLISH IS SO HARD TO LEARN
We must polish the Polish furniture.
He could lead if he would get the lead out.
The farm was used to produce produce.
The dump was so full that it had to refuse more refuse.
The soldier decided to desert in the desert.
This was a good time to present the present.
A bass was painted on the head of the bass drum.
When shot at, the dove dove into the bushes.
I did not object to the object.
The insurance was invalid for the invalid.
The bandage was wound around the wound.
There was a row among the oarsmen about how to row.
They were too close to the door to close it.
The buck does funny things when the does are present.
They sent a sewer down to stitch the tear in the sewer line.
To help with planting, the farmer taught his sow to sow.
The wind was too strong to wind the sail.
After a number of injections my jaw got number.
Upon seeing the tear in my clothes I shed a tear.
I had to subject the subject to a series of tests.
How can I intimate this to my most intimate friend?
I read it once and will read it again
I learned much from this learned treatise.
I was content to note the content of the message.
The Blessed Virgin blessed her. Blessed her richly.
It’s a bit wicked to over-trim a short wicked candle.
If he will absent himself we mark him absent.
I incline toward bypassing the incline.

Spelling Poems. (via Boing Boing)

PlayI came across today’s word in David Pogue’s New York Times Circuits email newsletter. The word is inanity. When I first read it I suspected it was a typo; that Pogue meant insanity. As the author of many typos I was quite excited to find a typo in a New York Times article.

Alas, inanity is a word. It is an noun meaning total lack of meaning, or or as Merriam-Webster puts it, “the quality or state of being inane.” Something that is inane lacks a point or significance.

Pogue’s article is about the pluses and minuses of Dell’s tech support. He writes:

“And even though they’re scripted to the point of inanity, the overseas reps have twice helped me, too, resolve problems to my satisfaction (including the time my hard drive died, and Dell replaced it at no charge).

You can see how the word insanity could fit in there too. But I think Pogue’s diction is more appropriate because the tech support questions often seem unrelated not crazy.

A side note about Pogue: he suffers from carpel tunnel damage so he uses speech-to-text to avoid irritating his condition, so I should have known the only typos to be found in his work would be incorrect diction not misspellings.