Wall Street has just been shaken by operations which have contributed to inflate prices and enrich funds and shareholders. On this occasion, the spotlight was turned on often very profitable speculative practices: trading in derivatives and short selling. What are they?
Derivatives are financial products whose value and function depend on another product, called an “underlying”. It can be a debt security, but also wheat, copper, oil, or even a stock market index, an interest rate, an exchange rate between currencies. Derivatives are products that aim to hedge against a risk. They are, in a way, insurance contracts offered by banks, insurance companies, and also companies.
They are the offspring of the crisis of financialized and globalized capitalism and its hiccups. From the late 1970s, they developed with it. Deregulation, the movement of currencies between them, that of capital from one continent to another, all this turmoil has given birth to the quintessence of speculation that are derivatives. In this tormented context, for example, a French exporter to the United States to be paid in dollars at the three-month deadline has every interest in buying from a bank, or even another company, a contract allowing him to insure against a fall in the US currency against the euro. Once purchased, this derivative product can be resold and one can even acquire a derivative to insure another derivative. Speculators have made their bed in this ocean of uncertainties by raising the financial mayonnaise.
They have also come to buy derivatives short. Short selling is trading in securities that you do not yet own, in the hope of buying them later at a lower price and making a profit. One sells during the day, for example 100 euros, the shares of a company X… in difficulty. We make a commitment to deliver them in three days. Just before the sale, we actually buy these titles which are only worth 90 euros.
We therefore sell them at their previous value of 100 euros, whereas we paid 10 euros less, 10 euros that we put in our pocket. A priori, one might think that this is a game that does not lead to consequences, except that in this world everything has to be paid for. This is how financial activities drain the resources produced by real activity and the working people find themselves in socks.