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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: tom pope who wrote (40511)	3/21/2005 11:12:51 PM
From: ChanceIs	Read Replies (1) \| Respond to of 206317

What are collateralized futures? I will try a quick explanation from what I assume is correct. As an alternative, try Googling "collateralized mortgage obligation" and suppose that the situations of an E&P and owner of a mortgage are analogous. Lets say I am an E&P. I therefore have assets in the ground (oil & gas). I sell forward a series of futures contracts, one each for May, June, July, etc against my future production. I don't get paid in full until I deliver. But I want my money now. I go to the bank. The bank gives me cash, and sells the income stream represented by the difference in my cost to produce, and the price I received when I sold the futures contract. The bank takes a lien on my oil in the ground as "collateral." The bank takes a cut. The purchaser of the income stream gets back his cash eventually plus a little more. I get a little less than if I had held the future position myself and waited. Enron would make such deals and use "mark to market" accounting to claim the entire revenue as being "in the bank" the day the deal was done, even though they quite often didn't monetize/collateralize and wouldn't have the cash in hand for years. It gets hard to grow earnings when you collateralize, mark-to-market, and claim the earnings up front.