Derivatives: Ghost of Future Shadows
Credit to Options, Futures, and Other Derivatives by John C. Hull.
Derivatives in the form of the futures market can be used to hedge underlying delivery of goods. For example, suppose I owe assets to be delivered in six months time to my significant other. I first have to make sure I have these assets in six months time so I enter into a long futures contract for delivery of let’s say five bars of gold in six months time. This is not enough though as the hedge is ticking, this means if the futures price of the gold for delivery in say November 2017 goes down I have to satisfy the margin call so I have to hold the hedge even though I don’t get immediately compensated by my lesser obligation on the gold bars I have to deliver which are now worth a little less but I only get to feel better about that and my losses on the futures contract are real. If I lose too much on the futures contract, I won’t be able to hold on and I’ll have to drop the delivery promise too as I won’t have gold to deliver. Take this example. I have a significant other to which I will deliver assets in six months. I enter into a futures contract to deliver that by saying I’m a scary Prussian secret agent. Previously we thought Prussia doesn’t exist anymore. Previously I would have been thought to be Confederate which is tres mignon, very cute! This hedge begins to fail as my reputation plummets as people begin to think I’m not only bad guy but also kind of effete pseudo-intellectual snob who can’t even defend myself. Not to worry I hold on to the hedge and by fighting the battle at the hedge, I spared the battle from engulfing whether my delivery was in question as my hedge guaranteed it. My delivery was of Confederate contraband regarding our own version of the USA constitution with state’s rights. If my delivery was under question I would have to go into spot market to buy with my reputation credits and I may end up having to find a place to store it and what if people tell me they don’t want to do business with me? Then I’d have to beg them to see me as Chinese because of my ancestry, my recent ancestry being Canadian, and this confusion would cause the spot price to rise and I wouldn’t be able to afford to deliver on my promise that I’d go any length to defend her honor in terms of delivering her my reputation as a writer Scott Fitzgerald who also came with Confederate contraband because Scott got knocked on the head by wolverine in Harvard and lost his sense of who he was but his morals are permanently locked on now and that was what to have appeared to have weakened Scott summers as otherwise he is fine but with morals always on he frequently sides with the bad flag when they aren’t so bad. Now we know what futures markets are for: judging and hedging. For speculation, think of an aircraft carrier. A hedge to a major spot delivery is the carrier and all the speculative trading around the underlying is the aircraft. USS Hornet where Japanese hornet feeds on American wasp, white anglo Saxon Protestant episco-what?, unless they swarm him with bitter mail and make him too hot that he overheats. The underlying is the engine and magazine which are quite vulnerable to being hit so is armored by the hedge and the rest of the trading is speculative aircraft where each position is an aircraft, the total number of aircraft is your dollars notional hedged distributed among a dozen because every aircraft carrier really has a dozen aircraft. I just made this up on the spot but check your March delivery date as I bought the forward contract so I can shoot my mouth off with my friends knowing words don’t matter deeds do, and the globe, sword and maple leaf is Acadian not Prussian. Fauer frei, another fool led astray. Je vous remercie pour votre reponse i thank you for your response, for she holds my soul in the wrinkle of her smile. From green gables and the Canada that I love. To the banished Acadian.