leverage and hedging

Picciotto, Sol s.picciotto at lancaster.ac.uk
Thu Oct 1 09:50:57 PDT 1998

Do you have any evidence for your assertions, other than having talked to a Bear Steans analyst? Have you read any of the research papers on either commodity futures or financial futures, such as the work by Holbrook Working which I mentioned? There is a major difference between dealers who hold inventory and a producer, such as a farmer, who merely needs to hedge a price. The research I cited shows I think very convincingly that it is inventory-holding which provides the basis for a market in standardised futures, as opposed to simple forwards contracting, which is all a farmer generally needs. Of course, a major oil company holds inventory, and is unlike a farmer.



> ----------
> From: boddhisatva[SMTP:kbevans at panix.com]
> Reply To: lbo-talk at lists.panix.com
> Sent: Thursday, October 01, 1998 4:45PM
> To: lbo-talk at lists.panix.com
> Subject: Re: leverage and hedging
> 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.
> peace

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