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Market finally able to exhale
14 Mar '08
3 min read
If the current asset diversification into commodities continues, it is quite conceivable that we shall see open interest grow to 35 or 40 million bales over the next year or so, while the US crop may not amount to much more than 15 million bales.
This game has simply gotten too big for the trade to control, not just in terms of size, but primarily from a cash management point of view. Even though the majority of the trade may have weathered last week's storm, it is now keenly aware of the dangers and we therefore expect some major adjustments in the way risk is managed.
Outright short futures and short calls should be a thing of the past as merchants will once again make use of long puts and calls in their risk management approach.
Cotton traders were not the only ones receiving margin calls lately, as there were plenty of stories in the financial press about hedge funds getting into trouble due to excessive leverage. At the end of 2007, the average hedge fund had a debt to asset ratio of 32 to 1!
Today the Carlyle Group's mortgage-bond fund failed to meet more than 400 million dollars of margin calls after it defaulted on 16.6 billion dollars of debt yesterday. The fallout from this collapse could put further strain on already stressed credit markets if lenders opt to liquidate the fund.
The financial industry is in its worst crisis ever after over 190 billion dollars in asset write downs and credit losses so far and as a result lenders are raising borrowing rates and demand additional collateral against loans. After this debacle there may be further downgrades, even of higher-grade securities, which could put tremendous strain on the entire financial system.
Click here to view more:
This game has simply gotten too big for the trade to control, not just in terms of size, but primarily from a cash management point of view. Even though the majority of the trade may have weathered last week's storm, it is now keenly aware of the dangers and we therefore expect some major adjustments in the way risk is managed.
Outright short futures and short calls should be a thing of the past as merchants will once again make use of long puts and calls in their risk management approach.
Cotton traders were not the only ones receiving margin calls lately, as there were plenty of stories in the financial press about hedge funds getting into trouble due to excessive leverage. At the end of 2007, the average hedge fund had a debt to asset ratio of 32 to 1!
Today the Carlyle Group's mortgage-bond fund failed to meet more than 400 million dollars of margin calls after it defaulted on 16.6 billion dollars of debt yesterday. The fallout from this collapse could put further strain on already stressed credit markets if lenders opt to liquidate the fund.
The financial industry is in its worst crisis ever after over 190 billion dollars in asset write downs and credit losses so far and as a result lenders are raising borrowing rates and demand additional collateral against loans. After this debacle there may be further downgrades, even of higher-grade securities, which could put tremendous strain on the entire financial system.
Click here to view more:
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