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Let me hedge, but I won’t pay
20 April 2010
Large companies moaning about having to post collateral against derivatives have forgotten the real value of hedging, argues Philip McBride Johnson.
Read more:
[futures]
[derivatives]
[hedging]
[collateral]
[margin]
[over the counter]
[OTC]
[Chicago]
[grain]
The year is 1859. Somewhere in pre-Great Fire Chicago, a man gestures somewhat obscenely to another gentleman and the nation’s very first futures contract is traded.
Chances are, this soon-to-be Cubs fan made the contract for a Midwestern farmer (or his grain elevator) to hedge against bad weather, bad luck or bad genes. A specific number of bushels of pretended grain were thereby created.
Odd, when you think about it. Here is a fellow who is worried about a glut of real wheat that will depress his selling price while, in response, he exacerbates the situation by inventing make-believe grain as well. Anyway, he has his price protection.
Now comes the bad news. “You owe me a commission,” says the trader to the farmer, “as well as a margin deposit of $1,200.”
Flummoxed, the reply is: “Your fee...
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