Chapter 12 focuses on managed futures. As one of many different trading strategies in the alternative investment universe, managed futures investing involves speculative investments in gold, oil, and other commodities that change in value in accordance with price fluctuations.
Measure risk: Accurate and timely measurement of risk is essential to
effective risk management. A bank that does not have risk measurement
tools has limited ability to control or monitor risk levels. Further, more
sophisticated measurement tools are needed as the complexity of the risk
increases. A bank should periodically test to make sure that the
measurement tools it uses are accurate.
Americans have always loved risk-takers, the man or woman
with ambition and vision who goes for broke. “Boldness of
enterprise is the foremost cause of its rapid progress, its strength
and its greatness,” Tocqueville wrote as he surveyed the nation’s
business landscape well over a century ago. Although American
business and financial life reminded this French observer of “a
vast lottery,” he marveled at the extent to which Americans “encourage
and do honor to boldness in commercial speculations.”...
However, a major change in the relationship between the credit rating
agencies and the U.S. bond markets occurred in the 1930s. Bank regulators
were eager to encourage banks to invest only in safe bonds. They issued a set
of regulations that culminated in a 1936 decree that prohibited banks from
investing in “speculative investment securities” as determined by “recognized
rating manuals.” “Speculative” securities (which nowadays would be called
“ junk bonds”) were below “investment grade.
Late in 2005, in the aftermath of Hurricane Katrina, U.S. newspapers were filled with
speculation as to whether New Orleans would continue to exist as a great and unique
American city. Levee and floodwall failure had inundated large parts of the city and resulted
in more than 1,500 deaths and catastrophic damage to property and the economy. In
2011, extreme amounts of precipitation, inadequate levees, and possible mismanagement of
reservoirs contributed to widespread flooding around Bangkok, Thailand.
Because of the special risks associated with investing in Emerging Markets, sub-funds which invest in such securities should be
considered speculative. Investors in such sub-funds are advised to consider carefully the special risks of investing in emerging market
Even if an entity otherwise holds a “substantial
position” in swaps, it would not qualify as a major swap
participant if those positions are held for “hedging or
mitigating commercial risk,” among other exceptions.
However, the proposed deﬁ nition of “hedging or mitigat-
ing commercial risk” would exclude swap positions held
for speculative purposes.
21 As most private funds would
presumably be deemed to be holding their swap positions
for speculative purposes, that exclusion is unlikely to
apply to them.
A more widely used device is the buying and selling of futures contracts on the commodities
exchange. All individuals or firms holding agricultural commodities for which futures markets
are available may guard -- "hedge" -- against price changes. Essential marketing services are
performed by the people who run the futures exchange and enforce its trading rules, the brokers
who act as agents on the floor of the exchange, and the speculators who assume the risks and
thus make hedging possible.
Chapter 19 - Options markets. After studying this chapter you will be able to: Understand how call and put options are used and how they are priced, examine the instruments traded on the australian options market, understand how options can be used for either risk management or for speculative purposes.
In this chapter, the following content will be discussed: Background on options, speculating with stock options, determinants of stock option premiums, explaining changes in option premiums, hedging with stock options, using options to measure a stock’s risk.
A high yield, or “junk” bond is a bond issued by a company that is considered to be a
higher credit risk. The credit rating of a high yield bond is considered “speculative”
grade or below “investment grade”. This means that the chance of default with high yield
bonds is higher than for other bonds. Their higher credit risk means that “junk” bond
yields are higher than bonds of better credit quality.
Proudhon represents speculation as a type of production. However, like all human activity it can be misused – “unproductive speculation,” the stock market acting as, “the temple,” for this ritual. He adds that unproductive speculation is an inherent part of the economic system.
All industrial, commercial and financial combinations are governed by chance: speculation thus involves some level of risk. The reward from the transaction is therefore two-fold: for the newly created utility there is the reward for a service and a speculative gain for the risk assumed. This second part, the jobbery, is the object of abuse: sought for its own sake, irrespective of any service supplied, this remuneration of risk can be classified as a game or even as a fraud. Speculation is thus the art of becoming rich “without working, capital, trade or genius.
In an economic system that is based upon individual behaviour and not upon conformity, that is to say, it is based upon, “the absence of mutual interest amongst the factors of production” no law prohibiting abusive speculation is possible. The period of time between delivery and payment, being the condition of lending and of trade, produces a risk to production and to the transportation of goods.
This chapter describes the workings of futures markets and the mechanics of trading in these markets. We show how futures contracts are useful investment vehicles for both hedgers and speculators and how the futures price relates to the spot price of an asset. We also show how futures can be used in several risk-management applications. This chapter deals with general principles of future markets. Chapter 23 describes specific futures markets in greater detail.