leverage and hedging

boddhisatva kbevans at panix.com
Thu Oct 1 08:45:19 PDT 1998

To whom...,

It is definitely not a falsehood that farmers or anyone else that sells or uses commodities hedges in the futures market. What is true is that there is a lot more speculative trading than fixed hedges, but the two go hand in hand. A Bear Stearns analyst explained to me that petro-product users can lock in prices up to five years into the future. Naturally, they try to unwind those position if they think they can lock in a better price and they may be forced to trade out of taking delivery if the price goes up. That's where the fun begins.

Punters can and do drive prices up and down but they can only play for a limited time. Eventually, large institutional sellers or buyers come in and the traders have to go the other way. If this wasn't true, why would traders run scared at any rumor of changes in industrial output or demand for a commodity? Real producers/consumers of commodities take positions, and unlike day traders you can't play chicken with them. It's very frightening for a futures trader to go up against someone who actually intends to take delivery at the strike price.


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