Credibility derivatives
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Credibility derivatives were once the principal means of hedging tail risk in fashion industry. They grew out of the popular pastime of taste arbitrage, a much simpler physically-settled contract on the spot market.
Origins
The urban myth was that an analyst in the taste arbitrage desk at Wickliffe Hampton by the name Albert Coldfall, invented the credibility derivative when out shopping for records one sunday in 1987.
Coldfall noticed that his local record store in Chingford, which carried Rick Astley’s turgid debut Whenever You Need Somebody at full price, had nonetheless sold out of it, while fully fifteen copies of Keith Jarrett’s seminal, hard-to-find and unstintingly cool The Köln Concert lingered disregarded in a sale bin for a pound fifty each. Not realising what he was doing, Coldfall snapped up all fifteen, just on principle.
Later he happened to pass a vinyl emporium in Soho and, remembering the shop in Essex, popped in to compare prices. He was amazed to a queue forming for The Köln Concert, advertised at £25.99 but sold out. Coldfall eventually found the single copy the shop could see fit to even hold of Whenever You Need Somebody[1] in its own sale bin, for 50p.
Coldfall offloaded his fifteen jazz albums directly to disappoionted shoppers as they stood in the queue for £40 each, and realised that once he could set up a Long dated transaction to exchange these items, and thus allowing record shops to hedge their risk to changing tastes, and lockin prices where they expected popularity to grow, and a new asset class was born. But lurking below the surface was disaster in the form of fashion duration mismatch.
Growth of asset class
Taste arbitrage quickly grew out of its origins in the second-hand record market. Before long, credibility derivatives were big business in the clothing industry: a segment of the economy, of course, with significant exposure to sudden, arbitrary changes in the public’s opinion.
Speculators in the City of London quickly saw the opportunity for levered plays on taste, and the synthetic credibility default swap market exploded. Desperate to find a fresh sources of loucheness to feed the demand flooding in from hedge funds and trading desks, fashion standards among originators taste products rapidly declined. Originators talk to layering credibility default risk upon credibility default.
Great credibility crash of 1987
It all came to a juddering halt with the in acid-wash jeans crash of 1987. Unable to trade out of positions as the market turned, and unable to fund their obligations to term as liquidity drained from the commercial paper market, many storied couturiers found themselves having to close short enormous long positions. Those who could not care successful found themselves in receipt of container loads of unsellable white denim dungarees.
See also
References
- ↑ Allegedly a requirement of the promoting record company to carry the number-one selling album of the time, which may explain why the boutique was having it at all: every man has his price.