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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: infopleez who wrote (4278)	11/20/2001 11:18:00 PM
From: russwinter	Respond to of 36161

Example: you as a producer hedge by buying puts, or selling calls (naked) against a commodity (oil, gold, whatever). Often, in fact usually, done in the OTC market with another institution, or banker. There is a counterparty (a bullion bank, or an Enron in the case of oil or electricity) on the other side. Suddenly, (in a disrupted or high delta market) you decide you need to exercise or close out. What if your counterparty (JP Morgan or Goldman Sachs or Deutsche Bank, etc.) has failed. What if Enron fails now? Who delivers on the other side of your trade? The point is the counterparty risk on these transactions. These "hedges" are only as good as the institution on the other side of your trade.