TOOLS Since margined investing is limited to 50%, other devices had to be created, which would expand the elite's manipulating power in both the scope of investments and amount of leverage. This birthed the futures and options contracts, which are different in application, but the same in principle. While originally developed for price discovery and risk aversion, they have both evolved into tools for manipulating investment values.
Futures is a contract that allows an investor to buy or sell a commodity (gold, orange juice, coffee, etc.) or a financial instrument (government bond, foreign currency, stock index, etc.) on varying margins at a predetermined price. It allows the buyer to control much more investment than he has actual money for. The influx of margined futures buying creates an artificial demand for that commodity or financial instrument, which drives the price artificially high. On the other side, the influx of margined futures selling creates an artificial supply of that commodity or financial instrument, which drives the price to an artificial low. The operative word on both sides of a futures contract is "artificial." This allows the financial establishment to use their vast financial resources in the futures market to manipulate investment values, up or down, according to a predetermined purpose.
Options differ from a futures contract in that the option buyer only purchases the "right' to buy or sell the "underlying" security (stock, stock index, commodity, bond, etc.) at a fixed price before a specified date. For this "right," the options buyer pays a fee called a premium (like a down-payment), which is forfeited if the buyer does not exercise the option before the expiration date.Options were originally used to hedge the financial risks that farmers faced from big swings in the price of their crops. In the beginning this was a good thing, bur man's love of money caused him to pervert that purpose by using their leveraging ability for get-rich-quick speculation in those markets. Many options traders made fortunes, while at the same time many lost fortunes. However, in the hands of the financial elite, it becomes a tool that enables them to manipulate markets with debt created by FRB.
A Forward Contract is a completed contract that actually purchases or sells a specific amount of a commodity or financial instrument at a price specified now, with delivery and settlement at a specified future date.'' Although it differs slightly from futures and options contracts, both futures and options are often used to either hedge the investor from potential risk or w multiply the effects of the forward contract.
Derivatives are financial contracts whose value is derived from the underlying or "notional value" of the borrowed investment. The high degree of leverage associated with these financial instruments (50%-90%) makes them highly volatile and subject to huge losses in the blink of an eye. By April 1994, the "notional value" of the derivatives market had grown to $ 13 trillion. But what is important to understand is that the worldwide investment market (stocks, bonds, mutual funds, currencies, money markets, etc.) only totaled about $48 trillion at that time. This meant that over 27% of the global investment market had been leveraged in the derivatives market and was at risk of collapse.
Up to this point, only higher-risk securities were used to conjure up derivatives, but as the supply of the higher risk securities had been borrowed up, derivative dealers were forced to borrow securities from mutual funds, money markets, bank deposits, and other safer investments. Derivatives also showed up in numerous quasi-governmental agencies. Agencies such as the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and the Student Loan Marketing Association, and many others quickly became major users of these exotic derivatives. If these derivatives get into trouble, the U.S. government is expected to bail out investors at the taxpayer's expense. This means that even the safest investments, such as money markets, low-risk securities, and taxpayer-backed government investments are being gobbled up by derivatives dealers.
Black-Scholes Formula for Options Trading
The original formula for options trading became too limited in its scope of investments and ability to leverage. In 1973 Fischer Black (deceased), Myron Scholes and Robert Merton developed the 1973 "Black-Scholes Model for Options Trading". This complex pricing model revolutionized how options could be used. It expanded the scope of investments to include a multitude of financial instruments, and dramatically increased the user's leveraging ability. In other words, more fractional reserve type debt could be created out of nothing to buy or sell investment assets, which further enhanced the elite's ability to manipulate the markets. The Black-Scholes Model is flexible enough to do almost anything with. When applied to the advances in computer processing and telecommunications, this formula virtually created a multi-trillion dollar investment market out of thin air