Re: Greenspan' and Derivatives

[Michael T Metz <mtmetz@xxxxxxxxxx>]

One reason:
Transactions costs associated with financial distress.
What "...if you think something is going to go [up]" and it
doesn't? If a firm has uncertain income associated with
price, interest rate, or currency volatility and there is a
minimum threshold level of income which the firm must
maintain to avoid transactions costs, it is rational for
the firm to minimize the probability of that downside risk
by hedging.

Michael Metz

-----Original Message-----
From: pkt-owner@xxxxxxxxxxxxxxxx [mailto:pkt-owner@xxxxxxxxxxxxxxxx]On
Behalf Of Stan Jonas
Sent: Saturday, March 15, 2003 1:02 PM
To: pkt@xxxxxxxxxxxxxxxx
Subject: Re: Greenspan' and Derivatives


Actually since the work of Holbrook Working circa 1940's analytically we've
known
that arbitrage and "hedging" as you describe it are indistinguishable..

Why hedge.. if you think someting is going to go down.. sell it....get out..
Only rationale to "hedge" is that you think you can structure a defacto
positive
expected value arbitrage"...


----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Saturday, March 15, 2003 1:16 PM
Subject: Re: Greenspan' and Derivatives


> Arbitrage is not the same as hedging:
>
> Arbitrage: Simultaneous purchase and sale of two different contracts (or
> a combination of cash and futures) to take advantage of perceived
> mispricing. In a pure arbitrage, mispricing is locked in and a risk-free
> profit made through trades.
>
> Hedge: A sale of futures contracts to offset the ownership or purchase
> of the underlying cash commodity in order to protect it against adverse
> price moves; or, conversely, a purchase of futures contracts to offset
> the sale of the underlying cash commodity, again for protection against
> adverse price moves.
>