We May Not Know What the Risk Really Is, but We Probably Have a Notion

In the realm of finance there is what is known as notional risk value. Financiers may not know what the risk really is, exactly, but they have a notion.

To assign the probability a nominal value (knowing enough about what is probably not known), derivatives, for example, are given a price that discovers the risk actualized in the futures (sometimes referred to as the strike price). This is what we saw with Deutsche Bank last week.

Financial stocks moved down (and are now considered undervalued) because it was not clear what the risk is, but there was a notional value.

Notional risk affects the value of derivatives Over The Counter (OTC). It is an identity element to determine a gain or a loss depending on actual depreciation of underlying assets, which is an actual, measurable value (the effect) that disambiguates the arbitrage argument.

In the case of Deutsche Bank it was not a “Lehman moment” because the bank is not illiquid but, nevertheless, signals from the German government “suggested” it was another systemic-risk episode in a TBTF dimension that may be allowed (privately enterprised with proprietary business models)) to fail. The suggestion is a notional-risk identity: What actually happens if Deutsche Bank can’t meet its extensive derivative obligations, which is a massive multi-trillion dollar liability worldwide?

What the risk really is, exactly, we may not know. It is proprietary, but we have a pretty good notion that strikes the price to be paid, existing now, discovered on demand.

Notional risk value is all about controlling for the price to be paid, OTC between counterparties, contractually obligated in the futures. The abstraction has a Kantian aspect to it — knowing but not knowing the real thing in its actual quantum state until it happens as a measurable effect; but like Kant “suggested” (like when using the notional value) we have a pretty good “idea” of what it will “naturally” be.

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About griffithlighton

musician-composer, artist, writer, philosopher and political economist (M.A.)
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