Posted on 09/19/2008 5:52:08 PM PDT by politicket
Futures markets work in exactly this way, and even worse, for every long there is a short because they are opposite sides of the same contract. And hedgers and producers enter into futures contracts exactly because they are speculating about future market prices and the consequences. A baker buying wheat thinks the price might go up, or is betting it won't go down. Otherwise he would simply purchase in the cash market. A producer is betting the price will go down, or at least won't go up.
Short sales are often a way of hedging down-side market risk for transactions. They serve multiple valid purposes.
I am involved in the negotiation of the acquisition of company a by company b. I acquire shares of company b, whose price will be higher when the merger occurs. But I don't want the risk that the overall market will drop, so I short shares in company a, thus betting only on the likelihood of the merger occurring and not the overall direction of the market.
I have an overseas tour company that does $50,000,000 in business in Europe, tours price in dollars, but the transactions are actually in Euros. I don't want to take the risk of adverse currency moves, since my business is otherwise profitable so I purchase currency futures. Somebody in Europe doing the opposite sells the same future I just bought (or some middle man buys and sells these futures, making a small commission while keeping his risk low by holding a portfolio of these things).
Short sales, sales at today's price, for a future delivery are a legitimate part of free market transactions.
Just like there was no speculation in the oil market until with the dryup in credit to support large positions in oil futures the price collapse by 30%.
If you mean...that for every long that is actually "wanting" delivery...there is a physical seller..Then yes, you are correct.
But if you mean for every long contract..in let's say "CBOT Wheat"...there's a short contract. You would be wrong.
Naw, I didn't think so........
First, it sounds like you're engaging in insider trading. Second, the acquiring company typically drops in price.
But I don't want the risk that the overall market will drop, so I short shares in company a, thus betting only on the likelihood of the merger occurring and not the overall direction of the market.
The price of shares in company a will rise when the merger occurs. Congratulations, you've managed to lose money on both sides of your "hedge".
I think that this is a great time to buy a big house in a nice area. Interest rates are being pushed down artificially in a frantic attempt by the Fed to reinflate the housing market. A mortgage of 5.5% is possible now, that's 30 years fixed. But housing prices have already declined a great deal off their Fed-induced highs. Depending on the market, locking in a low interest rate now makes good sense in view of the fact that the bailout will certainly lead to terrible inflation. I think the real inflation rate will rise to about 15%, the CPI will be more like 10%, and it will stay there a few years. This will eat the value of the monthly mortgage payment even as it drives up sale prices.
I remember when I was first married and looking to buy a house end of the 80s how I envied the folks who'd bought end of the 60s or early 70s. Both the purchase prices and their fixed rate mortgage payments looked ridiculously small. But I'm sure it didn't seem that way when they bought their houses - but that's what it became after the sustained high inflation of the 70s.
I had exited the market some time ago and plopped the money into foreign real estate, which did quite well (mostly). I think it's time to buy something big now in a terribly depressed place like southern Florida or out in California someplace, like LA, Orange County, or Bay Area.
This bailout makes inflation a certainty. I say protect yourself now by getting an inflation hedge, like a big old repossessed house someplace nice.
Where do you think these contracts come from? They don't exist until someone sells one. The seller creates a contract out of thin air, unless he is reselling one previously created out of thin air. Andy is 100% correct.
It is clear you were never involved in risk arbitrage.
Maybe you can explain what risk arbitrage involves?
Are you familiar with the COT....
Go there and total up the net long contracts...and then the net short contracts.
Here's an example.
9-16-08 CBOT Soybeans.....NET LONG 329,323 contracts....Net Short 298,772 contracts.
No, I am talking about a futures contract, regardless of who buys or sells. They are not like shares of stock which are issued by a corporation. When a new month is opened, there are zero outstanding contracts.
The first contract "appears" when someone creates one out of thin air and sells it.
Go there and total up the net long contracts...and then the net short contracts.
I just did, they add up to zero.
You should remember to add the non reportable positions to the soybean numbers you posted. I think you’ll find the summs are equal.
http://www.cftc.gov/dea/futures/deacbtsf.htm
Because of the risk that the deal will not go through. Risk arbitrage is identifying likely mergers and placing bets on the fact that they will happen.
That is why in risk arbitrage you short it. D'oh!
That is why in risk arbitrage you short it. D'oh!
Exactly. So you'd have to be stupid to say this, "I am involved in the negotiation of the acquisition of company a by company b. I acquire shares of company b, whose price will be higher when the merger occurs"
Ok, I was typing fast and got my a and b mixed up.
I was going to send you the same link. It's simple enough that even you could understand it.
In a stock for stock merger, the acquirer proposes to buy the target by exchanging its own stock for the stock of the target. An arbitrageur may then short sell the acquirer and buy the stock of the target. This process is called "setting a spread." After the merger is completed, the target's stock will be converted into stock of the acquirer based on the exchange ratio determined by the merger agreement. The arbitrageur delivers the converted stock into his short position to complete the arbitrage.
I'm glad we were able to clear up your confusion. Remember, insider trading is illegal.
It is clear you were never involved in risk arbitrage.
Still funny.
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