Clarifications. An uninformed investor is one who has no superior information Uninformed is not the same as uneducated or ignorant. An informed investor is one who has information other market participants do not. Clarifications.
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An uninformed investor may be as educated and as sophisticated and knowledgeable and as highly able and trained as an informed investor. It is not superior ability, merit, education, training, birth, social position or any personal attribute that makes the informed investor informed, it’s the fact that they have superior information! :)
Bank pays builder interest at a fixed rate and receives variable payments from homeowners
Result: builder protected against interest rate fluctuations
The notional amount of the contract is the total amount the builder lends to the homeowners. The cost of the contract is very small, but the potential gain or loss is quite large because the notional amount is large.
The potential gain or loss in value of the derivative is huge.
If the underlying asset is volatile, the derivative is even more volatile because it is so leveraged.
For the interest rate swap, a 1% interest rate change can cause thousands of dollars per year change in cash flows. A very small investment, can produce returns (positive or negative) of several thousand percent.