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Edwynn -> RE: Big Bank speculating adds $10 per fill-up (7/22/2013 9:25:39 PM)
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ORIGINAL: MrRodgers
Derivatives are merely a form of insurance against losses. A futures contract is the paper purchase of the commodity itself.
It might or might not be, for an actual producer or consumer of the commodity in question. It most certainly is not such a thing for the speculator. Some futures are settled on a daily basis. That is, money is transferred from one side of the bet to the other as the spot price changes vs. the strike price in the contract. Anyone can buy a futures contract, a forward, a put or call option, with out having to deliver or take delivery of the underlying or referenced asset in question.
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So now we have two reasons why actual users such as big oil and big agra...hate these instruments all only necessary because of the speculation in these products far too easily done via paper without actually taking delivery or handling the product.
So why did Koch Bros invent them, then? They had/have a large position in refineries is why. Futures on commodities have been around since post-mid 19th century. They were the first to recognize the asymmetrical information advantage to enhance profits from the speculation. They actively invited the dupes into the party, but congratulations to the few that could find a sucker counter party to whatever bet.
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So I need to get in on the futures speculation to hedge the value of my inventory upon which my profit and taxes are computed. Then I buy a derivative to...hedge against my hedge. The actual spread between prices and hedges creates yet another speculation in the value of the derivative. Hence the desire of many big money movers to do what...create yet another exchange of derivative or a piece of paper upon which...to even further speculate.
I would 'speculate' that ExxonMobile, which ranks highest in profit year upon year, roughly twice the profit of no. 2 Microsoft, can afford to hire all the quants they need to deal with the situation.
Exxon is as big a money mover as any of them, and to be crass, blunt, etc., they wouldn't swamp the rest of the corporate world twice over in profits by just sitting idly by and hoping for the best from dimwit hedge traders.
The largest oil companies have the insider information from both the supply and the demand side, being as that they control marketing and distribution. The successful commodities traders anticipate, but they sure as heck don't lead.
The oil companies shut down three hundred of their refineries (in the US) in twenty years, for purpose of self-obtained price support. They can shut down or start up production at will, almost immediately counteracting any emergence that might arise against their favor. Speculative behavior adverse to the oil companies' interests is easily dealt with in short order, and certainly has been.
Tell me how many speculators can do that. And tell me how the producers and the refineries they operate can't change the situation in three days. Which, if you actually buy gasoline, is apparent on a near-weekly basis.
The buyers of fuel, for their business, get into futures for their own meager protection, and I'm sure some of them don't like the situation,
but they are the ones who suffer from the shenanigans of both the producer/seller and the speculators.
It is the purchasers of fuel, not the producers, that suffer from the 'financial innovation' aspect of what should be a relatively simple process of an otherwise simple 'value added' chain of commerce.
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