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Some random musings on derivatives

Some random musings on derivatives. PSU SBA brownbag presentation May 14, 2010. A bit on my background. Petroleum products purchasing in early 1990s. Jet fuel in airline industry Diesel fuel for wholesaler Designed “fixed-price” diesel fuel program for fuel wholesaler in 1992-94.

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Some random musings on derivatives

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  1. Some random musings on derivatives PSU SBA brownbag presentation May 14, 2010

  2. A bit on my background • Petroleum products purchasing in early 1990s. • Jet fuel in airline industry • Diesel fuel for wholesaler • Designed “fixed-price” diesel fuel program for fuel wholesaler in 1992-94. • Managed company’s fuel price risk by trading in crude oil and heating oil futures and options. • Academic career: research on corporate hedging since 1995.

  3. Some general overview • Derivative • Major types of derivatives • Forward contracts • Swap contracts • Futures contracts • Option contracts • Trading environment • Exchanges • Clearinghouse bears credit risk • Over-the-counter (OTC) • Historically, each counterparty bears the credit risk of other counterparty.

  4. Where do contracts trade? • Forwards → OTC • Swaps → OTC • Futures → Exchanges • Options → Both

  5. What types of “underlying assets” trade in derivative markets? • YOU NAME IT! • Currencies • Interest-rate • Commodities • Credit • Equity • Arcane contracts (weather, carbon, etc.)

  6. Current Issues • Do derivatives pose “systemic risk” to economies? • Basis for AIG bailout → counterparty in many credit default swaps (more on this idea later) • Derivatives markets will ultimately be more regulated. • Should all derivatives be cleared through central clearinghouse?

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