Thursday, May 10, 2012

JPMorgan's Imperfect Hedge

May 10, 2012
JPMorgan suffers big loss

The division that suffered the losses is a so-called proprietary trading unit that had been making trades to hedge against risk.

I feel somewhat responsible. Perhaps I was not clear enough in a previous post?

May 7, 2012
The Perfect Hedge!

Warning: This post contains tongue-in-cheek sarcasm. Read at your own risk.

Hedge! Hedge! Hedge! Hedge! Hedge!
<---- Sarcasm

5 comments:

Mr Slippery said...

The reporting is terrible on this story. How do you lose $2 billion on a hedge? If it was a hedge, then the whatever it was hedging should have gone up nearly as much as the hedge went down.

No, this was pure speculation, with taxpayers backing the losses like in 2008. The other big lie is when banks talk about their "net" exposure, as if all counter parties are 100% money good.

AIG proved that was a lie. There is something north of $500 trillion in various derivatives exposure floating around, and when the next AIG happens, I'll be forced to unfurl my Told Ya flag.

Couldn't have happened to nicer people.

Stagflationary Mark said...

Mr Slippery,

How do you lose $2 billion on a hedge?

Easy! You see a hedge you like. You spend $2 billion. Bring it home. For safety, plant it in concrete. ;)

If it was a hedge, then the whatever it was hedging should have gone up nearly as much as the hedge went down.

Only perfect hedges do that. Imperfect ones don't. Granted, imperfect hedges often look a lot like speculation to amateurs, lol.

Here's an example of an JPM's imperfect hedge.

Stagflationary Mark said...

D'oh! My last sentence has imperfect grammar.

nanute said...

22 or 2 billion. Not much difference, right? And, I've never seen a hedge in concrete.

Stagflationary Mark said...

nanute,

There must be a derivatives winner for every derivatives loser. It's a zero-sum game.

So here's what I really want to know.

If JPM lost $2 billion, then why won't someone step forward and claim victory? Just think how much the stock market would rally if they would!

Deck chairs. Titanic. Rearrangin'.