Texas Hedge

Saturday, August 26, 2017

Bagikan :

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My get-go reaction to the JP Morgan loss was , if their "hedge operation" had larn a "profit center" equally reported , nosotros know precisely what went wrong. (And , if they weren't playing alongside a authorities guarantee , who would assist if they lost $2 billion together with merely about hedge funds gained $ two billion?)

Andy Lo pose it beautifully:

Yes , nosotros tin post away grade the departure [between hedging together with trading]....There is 1 rattling unproblematic query that you lot tin post away inquire — which has a definitive response — nearly the small-scale pose out of individuals who were responsible for managing this grouping at JP Morgan together with putting on the specific trades that lost these large amounts of money. That query is: How were they compensated on an annual basis? Were they paid a salary together with a bonus , together with was the bonus a component of the profitability of the grouping , or was the bonus a component of the hedging mightiness of the group? If you lot tin post away response this query — together with it definitely has an response to it; it’s non a metaphysical query — you lot volition accept your response equally to whether it was proprietary trading or hedging. I don’t know the response , but I know the response exists , together with I know that sure enough the authorities tin post away larn that response alongside a unmarried telephone call. 

Hedging is supposed to lose coin when everyone else makes money. That tin post away last measured. The risks of the entire banking enterprise , which hedgers are supposed to minimize , tin post away last measured.

I intend Andy knows the response to this question. I suspect I practise also , but mayhap I'm beingness also cynical.

(Thanks for pointer from Arnold Kling)

Tag : Commentary