<<But you have to assume both sides are 'hedged' no?? So only the 'spread' would hurt... long term capital?>>
well, since you're mentioning spreads, they have blown out to panic levels recently, so the old method of hedging agency paper with treasuries sure backfired in a big way (thank you Larry).
anyway, derivative hedges are a zero sum game...someone's gain HAS to be someone else's loss. so if the GSE's have a gain on their rate hedges, there has to be a loser somewhere. no way around that.
<<ie. If the company has 1 oz in the ground and sells 1 oz short forward @ $300. When the price goes to $400 does the company have to show a $100 loss if they haven't delivered yet?>>
that's exactly how it would work. mark-to-market means they'll have to book the paper loss. btw, even though they may have the gold for future delivery in the ground, the losses on hedges are nonetheless 'real'.
as for the bullion banks, once again, somebody IS assuming the risk in these transactions. for instance many hedged gold cos. have recently bought calls with strikes ranging from $300-$330, in order to hedge their hedges and have some upside exposure to gold prices. whoever sold them the calls (JPM, Deutsche, etc.) is exposed to the risk of rising prices. lets assume now that prices do indeed rise. in order to delta-hedge their exposure to the naked calls, the writers of the calls will buy futures contracts as the price nears the strike, essentially buying more and more until the strike price is reached, and then less and less as the price rises further above the strike, until their exposure is covered in full. the problem with this method is two-fold: for one thing, the risk is once again taken on by some other counter party (the sellers of the futures contracts), it can never be eliminated from the system. secondly, this method of delta hedging works only in an orderly market. during panic price spikes, when all the shorts try to cover their a** at once, it won't work.
hb |
