some definitions

[Steve Grube]

Regarding the simplified food chain of speculator and hedger:
The hedger in commodity futures can reduce the price risk
at sometime in the future only if there is a viable market place
for the futures contract he's interested in.  If he is trying to
hedge his situation that may involve a silo of grain or a
just-planted field of wheat, he needs to have a trading floor
somewhere that is *actively* trading, say March '99 wheat,
so that a good forward price is had.  That acceptable
price, and thus a well-hedged situation, can only work if
there are plenty of speculators in that commodity pit helping
to provide liquidity and thus a good price for hedgers. So
most of the activity *is* speculation, but that dynamic is
what makes hedging possible.  The big problem is when
hedgers get carried away and start speculating or the
speculators get overextended and real financial risks
occur.  The same argument more or less applies to
financial futures:  fund mgrs and brokerages have positions
that can be hedged for reduced risk.

-steve grube
======================

James Devine wrote:


> At 04:07 PM 9/29/98 -0700, you wrote:
> >A
> >>farmer sometimes "hedges" by signing a contract with someone to pay a
> >fixed
> >>price for some of his product in the future. This "locks in" the price,
> >so
> >>that the farmer doesn't suffer in a big way from price declines.
> >
> >I seem to remember reading in Wall Street about how this "fairy tale"
> >explanation (hardworking farmers transfer risk to speculators and
> >everyone lives happily ever after) is just that:  only a tiny portion of
> >futures contracts have anything to do with producers or consumers of
> >actual commodities.  Doug, if you could elaoborate?
>
> yeah, it's "only a tiny portion" -- but that's still _some_. It's easier to
> explain hedging with agricultural examples. Besides, it you listen to the
> radio in rural areas, they'll fill your ears with hog belly futures data.
>
> >>btw, how 'bout those Cubs?!? I expect to see pigs flying soon.
> >
> >Bastards.  I already had my tickets on order for the playoffs in
> >Candlestick.  And, speaking as a born-and-bred New Englander, the pigs
> >will start flying when the Sox win the Series.  The Cubs just suck -
> >they don't have the awesome tragic power of those afflicted with the
> >Curse of the Bambino...
>
> the White Sox?
> ;-)
> Jim Devine jdevine at popmail.lmu.edu &
> http://clawww.lmu.edu/Departments/ECON/jdevine.html