Comments on: Derivatives, The Future of Investing? http://www.consumerismcommentary.com/2005/08/25/derivatives-the-future-of-investing/ A premiere personal finance blog, established 2003. Within, Flexo discusses his own experiences with money, and he and other authors comment on a wide range of personal finance topics. Sun, 08 Nov 2009 07:50:42 -0500 http://wordpress.org/?v=2.8.5 hourly 1 By: Flexo http://www.consumerismcommentary.com/2005/08/25/derivatives-the-future-of-investing/#comment-813 Flexo Thu, 25 Aug 2005 19:44:24 +0000 http://wp.consumerismcommentary.com/?p=468#comment-813 Jeff, Thanks for the good look from the investment company's point of view. Jeff,

Thanks for the good look from the investment company’s point of view.

]]> By: Jeff http://www.consumerismcommentary.com/2005/08/25/derivatives-the-future-of-investing/#comment-812 Jeff Thu, 25 Aug 2005 18:48:22 +0000 http://wp.consumerismcommentary.com/?p=468#comment-812 This site, if used, shouldn't be used to "bet" on whether gas prices will rise, or if the price of energy will fall. Investing in the derivatives market is hugely complicated, and most futures contracts are reasonably efficiently priced, meaning there is no arbitrage opportunity for the regular investor. Investment banks have been doing this for years, but it is for the following reason: If an investment bank prices a complicated product at $9, they may sell it for $10. Since they don't want to actually make the investment themselves, they will hedge their $9 worth of exposure and pocket the $1 difference. A consumer at this site pays a premium for the contract, which by definition will be more expensive than it is actually worth (the company needs to make money). Thus their expected return is negative over time. Sure it's exciting to bet whether gas will jump over $3.00 a gallon, but if the price of the bet outweighs the expected payoff, it's obviously not a good bet to make. Jeff www.roadtorich.com This site, if used, shouldn’t be used to “bet” on whether gas prices will rise, or if the price of energy will fall. Investing in the derivatives market is hugely complicated, and most futures contracts are reasonably efficiently priced, meaning there is no arbitrage opportunity for the regular investor.

Investment banks have been doing this for years, but it is for the following reason: If an investment bank prices a complicated product at $9, they may sell it for $10. Since they don’t want to actually make the investment themselves, they will hedge their $9 worth of exposure and pocket the $1 difference. A consumer at this site pays a premium for the contract, which by definition will be more expensive than it is actually worth (the company needs to make money). Thus their expected return is negative over time. Sure it’s exciting to bet whether gas will jump over $3.00 a gallon, but if the price of the bet outweighs the expected payoff, it’s obviously not a good bet to make.

Jeff
http://www.roadtorich.com

]]>