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I guess I'm one of the ignorant; I'm still skeptical about derivatives. I get the need for hedging, but when you can construct something mathematically equival

by mbg721 6y ago

I guess I'm one of the ignorant; I'm still skeptical about derivatives. I get the need for hedging, but when you can construct something mathematically equivalent to a stock without actually putting money into the company, that seems like it could end very badly.

koheripbal 6y ago
Sorry if my comment came off as critical - probably could have been worded better. Derivatives are critical even to primary market participants. Farmers looking to secure their pay for future crop deliveries. Banks looking to remove interest rate risk on mortgages they've issued. Shipping companies looking to remove the risk of fuel fluctuations on their future transport costs. Fluctuations of cost inputs and uncertainty of future revenues can be a company death sentence as they cause cash flow shocks. They have real value to the economy. Often, they are only possible if there is a liquid market of people willing to take the other side of these transactions. Narrowing the spread between buy/sell prices on these derivative contracts allows more companies to be able to afford them, and that makes many low margin businesses able to exist at all. Despite all the hate on social media, these markets have material value. ...even if there are these anomalies like this Gamestop incident. I imagine the SEC is going to shut down that Reddit sub because these types if activities actually destroy liquidity but discouraging short sellers. Regulation plays an important role in keeping markets running smoothly.
imtringued 6y ago
Commodities have to be traded as futures because you cannot move commodities instantaneously. So what you do is you write on a piece of paper (its digital today) that you will provide X amount of commodities for price Y in Z days. You can then sell the contract for the total value of the commodities and when the contract is due you just send the commodity to the holder of the contract.

by mbg721 6y ago

koheripbal 6y ago

Sorry if my comment came off as critical - probably could have been worded better. Derivatives are critical even to primary market participants. Farmers looking to secure their pay for future crop deliveries. Banks looking to remove interest rate risk on mortgages they've issued. Shipping companies looking to remove the risk of fuel fluctuations on their future transport costs. Fluctuations of cost inputs and uncertainty of future revenues can be a company death sentence as they cause cash flow shocks. They have real value to the economy. Often, they are only possible if there is a liquid market of people willing to take the other side of these transactions. Narrowing the spread between buy/sell prices on these derivative contracts allows more companies to be able to afford them, and that makes many low margin businesses able to exist at all. Despite all the hate on social media, these markets have material value. ...even if there are these anomalies like this Gamestop incident. I imagine the SEC is going to shut down that Reddit sub because these types if activities actually destroy liquidity but discouraging short sellers. Regulation plays an important role in keeping markets running smoothly.

imtringued 6y ago

Commodities have to be traded as futures because you cannot move commodities instantaneously. So what you do is you write on a piece of paper (its digital today) that you will provide X amount of commodities for price Y in Z days. You can then sell the contract for the total value of the commodities and when the contract is due you just send the commodity to the holder of the contract.