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Pastimes : Ask Mohan about the Market
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To: yard_man who wrote (15304)4/1/1998 10:19:00 PM
From: Bilow  Read Replies (1) of 18056
 
ML isn't too dumb. What it means is that they hedged
off the exposure by simultaneously going short the
dow futures. Or they could have bought dow puts and
basically did a currency hedge and then sold them
in HK$. In any case, ML is not at exposure to market
risk.

The reason for all this is that the Hong Kongese have
seen their market wreck, know ours is just floating
a little higher in the same bowl, and they want to
make money from when ours follows theirs down to
the same septic tank. The effect on our market is to
increase the number of long held puts by the
given amount. It is short term bearish, long
term bullish, just like any large put purchase.

ML didn't hedge yet by purchasing puts from a standard
market maker, cause they would have made a big
dent in the open interest of a March expiry on the dow:
cboe.com . My guess is that they are
going to hedge themselves using the futures
market. This is done by selling a number of
futures equal to the number of puts times the
"delta" of the put. This has the immediate effect
of a program sell into our market, and then an
increase in the volatility because they have to
adjust their delta ratio as the market goes up
or down.

I wonder if their position is big enough to cause
a visible crook in the futures on the day they
start their hedge.

-- Carl
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