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Betting pensions on margin instruments?

by twawaaay 4y ago

orwin 4y ago
Edging mostly.
- ls612 4y ago
  I know you meant hedging but the typo is funnier.
  - djbusby 4y ago
    English pronunciation ;)
    - YawningAngel 4y ago
      We say the h
- twawaaay 4y ago
  Hedging... funny. It sounds important and smart until you realise, in simple words, what it means. I hate those kinds of words because they obscure the simple reality. When you invest in something you basically say that out of all possible options that were available to you, you predict the one you invest in will most likely (according to your risk assessment) bring profits. If this was your best choice, WHY IN THE WORLD would you invest in something that is doing the opposite? And there are other reasons not to play with borrowed money... Common sense says any kind of borrowed money costs. Hedging is used in short term situations, where you want to insulate yourself from market fluctuations. Say you are Lufthansa and you have tight budget and you don't want your budget ruined by changes in fuel prices. Knowing how much fuel you will need and at what time, you hedge against those changes. It will cost you but you treat this cost like insurance against disruptions of your business.
  - kasey_junk 4y ago
    > If this was your best choice, WHY IN THE WORLD would you invest in something that is doing the opposite? This is trivially answered via the oldest financial instrument in the world, agriculture futures. A producer trades potential upside in the future to lock in a price now, splitting the risk between themselves and the futures contract holder. If they couldn’t do that risk split most producers wouldn’t produce at all. A pension has a similar problem, they need to produce returns in the future, so splitting the risk now allows them to do that. It doesn’t matter if you are producing corn that takes 5 months to deliver, cattle which takes 2 years, timber that takes 15 or pension returns that take 30. Future production risk needs to be hedged to even engage in the activity.
    - rsync 4y ago
      "This is trivially answered via the oldest financial instrument in the world, agriculture futures." No, I think your parent has an interesting point ... People don't start farming soybeans because they have a free weekend here and there ... it's a long-term, sometimes generational undertaking that has one locked into these activities and investments. So, in that case, it makes sense you would use derivatives to hedge the activity you have no choice but to undertake. On the other hand, if you're just a trader-bro ... you do, indeed, have full autonomy and can buy or sell anything you like. You could just as easily afford equivalent protection by buying less of the underlying asset or buying another asset entirely. Unless, of course, there is a relative price mismatch between the underlying asset and the derivative - in which case it would make sense to pick up the protection cheaply ... ... but I still think your parent has a point that isn't so easily dismissed ...
      - djtango 4y ago
        One reason why you would opt to use options to hedge rather than sell your position (and be delta neutral) is due to materialising profits and incurring taxes just because you were being prudent about volatility
      - mellavora 4y ago
        I'm not sure how many trader-bros are allowed to make major decisions in pension funds, or why a trader-bro would want to work at a pension fund vs some other type of market participant which could reward their genius^H^H^H^H^H^H crazy risk taking.

Betting pensions on margin instruments?

orwin 4y ago

Edging mostly.

ls612 4y ago
I know you meant hedging but the typo is funnier.
- djbusby 4y ago
  English pronunciation ;)
  - YawningAngel 4y ago
    We say the h
twawaaay 4y ago
Hedging... funny. It sounds important and smart until you realise, in simple words, what it means. I hate those kinds of words because they obscure the simple reality. When you invest in something you basically say that out of all possible options that were available to you, you predict the one you invest in will most likely (according to your risk assessment) bring profits. If this was your best choice, WHY IN THE WORLD would you invest in something that is doing the opposite? And there are other reasons not to play with borrowed money... Common sense says any kind of borrowed money costs. Hedging is used in short term situations, where you want to insulate yourself from market fluctuations. Say you are Lufthansa and you have tight budget and you don't want your budget ruined by changes in fuel prices. Knowing how much fuel you will need and at what time, you hedge against those changes. It will cost you but you treat this cost like insurance against disruptions of your business.
- kasey_junk 4y ago
  > If this was your best choice, WHY IN THE WORLD would you invest in something that is doing the opposite? This is trivially answered via the oldest financial instrument in the world, agriculture futures. A producer trades potential upside in the future to lock in a price now, splitting the risk between themselves and the futures contract holder. If they couldn’t do that risk split most producers wouldn’t produce at all. A pension has a similar problem, they need to produce returns in the future, so splitting the risk now allows them to do that. It doesn’t matter if you are producing corn that takes 5 months to deliver, cattle which takes 2 years, timber that takes 15 or pension returns that take 30. Future production risk needs to be hedged to even engage in the activity.
  - rsync 4y ago
    "This is trivially answered via the oldest financial instrument in the world, agriculture futures." No, I think your parent has an interesting point ... People don't start farming soybeans because they have a free weekend here and there ... it's a long-term, sometimes generational undertaking that has one locked into these activities and investments. So, in that case, it makes sense you would use derivatives to hedge the activity you have no choice but to undertake. On the other hand, if you're just a trader-bro ... you do, indeed, have full autonomy and can buy or sell anything you like. You could just as easily afford equivalent protection by buying less of the underlying asset or buying another asset entirely. Unless, of course, there is a relative price mismatch between the underlying asset and the derivative - in which case it would make sense to pick up the protection cheaply ... ... but I still think your parent has a point that isn't so easily dismissed ...
    - djtango 4y ago
      One reason why you would opt to use options to hedge rather than sell your position (and be delta neutral) is due to materialising profits and incurring taxes just because you were being prudent about volatility
    - mellavora 4y ago
      I'm not sure how many trader-bros are allowed to make major decisions in pension funds, or why a trader-bro would want to work at a pension fund vs some other type of market participant which could reward their genius^H^H^H^H^H^H crazy risk taking.