In recent weeks, otherwise sophisticated commentators have made some basic yet potentially damaging errors about the amount of risk exposure held via credit derivatives. These assumptions, including those made by William Gross, Pimco’s chief executive, significantly overstate net settlement flows that would result on default of “underlying” entities. There is a danger this might create a climate of fear in financial markets in which companies, including Pimco, operate and which are already dealing with severe market volatility.

Critically, these errors ignore conventional market use of economically offsetting positions, which reduces the amounts at stake sharply. We seek here to illustrate some more down-to-earth assumptions; not to forecast the future. This is how the numbers really work: