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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Friday, November 19, 2010

Verbal Rhetoric Escalates

So far it has been an exciting day, despite very little scheduled economic data. Chinese reserve requirements rate hike came just in the middle of Ben Bernanke's speach in Frankfurt to defend QE. Did Chinese plan it? It is probably just too coincidental... Same goes for a number of comments from ECB, IMF et al on debt problems. I doubt they will be able to talk everyone out of this, as anticipation of eventual deal for Ireland is being priced in. I am not sure whether the deal itself will help as it opens doors for further bailouts for Spain, France, Portugal. Yields above 5% for any country will make IMF loan look cheap.

there are few ways out of debt laden economies in Europe: economic growth (valid only for Germany), deflation (yes here it comes again), outright default and full fiscal and tax consolidation (something we should have done long time ago) or as I call it "averaging down your costs. Issuing common Eurobonds might help, but, obviously Germany is against it. Anyway, it does not look like it is going to be a quiet end of the year.

No directional opinion on the markets yet, just watching the show.
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