I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

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Thursday, August 5, 2010

What's bothering me now

Before I take off for a long weekend, I just wanted to share with you some risks I see to the markets and that can derail all of my scenarios...

1. Deflation talk continues to accelerate and while it is known that prices tend to fall in such environment, I feel that immediate reaction to acknowledgement of this fact is uncertain. Dollar/commodities/equities relationship in the last several years had not been "real" supply/demand relationship... moreover there is a possibility of food inflation given the drought in Eastern Europe. Yet more and more people talk about deflation and from what I read in the news some are actually buying long dated bonds as protection. Go figure what it will be deflation or inflation

2. Some time ago I spoke about web bot software that predicted increasing tensions involving the US that might lead to a 3rd world war... Feels like that tensions between Iran / Israel and the US are likely to escalate given the assassination attempt of Iranian president and recent report on terrorism by the US where they called Iran biggest state sponsor of terrorism...
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