You are correct of course. People who aren’t finance people know nothing about hedging. For instance, if you are an oil and gas company and you buy a billion dollars worth of oil and gas reserves from another company. Are you really going to risk the price of the commodity falling and your deal becoming a big loser that bankrupts your company? Or are you going to hedge your exposure with a derivative? You and I know the answer.
Well, assuming arguendo your argument is valid, what happens when the price of oil inevitably collapses (historically it’s cyclical) and ole JP and others are broke and out of business like Lehman Brothers.
Your derivative is now toilet paper correct?
“People who aren’t finance people know nothing about hedging.”
Gents, my bets ride with Warren Buffet...a little known and marginally successful (pun intended) finance guy from Nebraska......Here is what he said in his 2002 Annual Report Letter to Investors pages 14-15
http://www.berkshirehathaway.com/2002ar/2002ar.pdf
“Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
“DERIVATIVES ARE FINANCIAL WEAPONS OF MASS DESTRUCTION.”
The prophet from Omaha said this 6 years before the last melt down....and he is still not trading this trash.
Illuminate us on the wonderful benefits of hidden tail risk, counter party risk, and large notational risk. This crap ain’t your grandaddy’s 2% interest rate hedge.
When the final bullet was pumped into the corpse of the 1933 Glass-Segal Act (which segregated the ownership and actions of commercial banks, insurance companies, and investment firms to prevent a repeat of 1929-1932) by the 1999 (Phil)Gramm-Leach-Bliley Act, the money boys just went wild didn’t they? And OOPS! We had 2007-20??.....
Yeah, but they say this time it will be different don’t they?
But, I don’t feel strongly about it and what the heck do Warren and I know about it anyway.