JayHecht at aol.com wrote:
> Now let's look at the Barings debacle. Perhaps a rather extreme
> example, but the way I understand it, the strategy was set to make
> money on SMALL perturbations (either up or down).
"The strategy" and the reality of what Nick Leeson did are far from the same. In actuality, he was never hedged (though that was his only mandate!) -- he was long stock index futures and net short the JGB and his (pure!) speculation went against him after the Kobe earthquake. He tried (though unauthorized trades) to fix it and ultimately made it worse. The failure of Barings had nothing to do with "those bad derivatives" but rather with single-minded criminality and asleep-at-the-wheel risk managers.
For an excellent technical treatment of this issue, see
http://risk.ifci.ch/137560.htm
> Look, one could imagine an anarchist farming community using
> futures contracts to "lock in" profits on their crops.
Why do you have to imagine it? Who do you think the natural hedgers *are* in the futures markets!?! How do you think the whole idea of a futures market came about?
/jordan