How Derivatives Create Money?

Those who don't know anything about Derivatives, let me tell you that Derivatives can make you estremely Rich in No time if used properly and can make Mass Financial Disaster according to Warren Buffet. So How Derivatives Create Money?

Well, first of all, let us understand Derivatives. Derivatives are those which derive their value from something else. Say for Example underlying Asset. Say for Example, Orange Juice is the Derivative of Orange.

Say for Example, Stock is the Derivative of a Company and Mutual Fund is a Derivative of Stocks. Mortgage is the Derivative of Real Estate. Now this is how Derivatives Create New Money.

Suppose, You have Rs.100 in your pocket. And your friend wants to borrow Rs.100 from you. So he asks for a loan of 100 rupees from you and he agrees to pay you 10% per year interest on it. So he gives you a written promisary note and you give 100 rupees in exchange of it. This promisary note is a Derivative. You have created this 10% (10 rupees).

Now suppose neither you, nor your friend has money. And your friend needs a loan. So you go with your parents and borrow Rs.100 from them and promise to pay 5% interest on it and give this 100 rupees to your friend at 10% interest. So at the end of one year, you will have 5 rupees out of nothing. means you will collect 10% interest with principal from your friend, five 5% to your parents and keep 5% with you. This is how You have created Rs.5 Out of Nothing.

Banks do the Same thing at large Scale. Banks collect literally millions and billions of dollars as a deposits from deposits and lend this money at mass scale by Derivatives and create money out of these Derivatives.

Whenever an Intelligent Investor put 10-20% Money as a Downpayment and Take 80-90% of Mortgage to Finance the Property, He creates money in true sense. So Rich people use Derivatived to become more richer....!!!