I am currently taking a derivatives strategies course and while I understand the concepts and theory behind what the professor is saying, I was curious if there are certain strategies that are more practical and used more than others. I apologize if this is a very general or basic questions. I am relatively new to all of this.
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Futures are used to hedge by refineries I think. In that sense they're extremely relevant to refiners and commodity traders.
OTC derivs like interest rate swaps are used daily world over to cover loans like auto insurance.
Derivs are pretty cool stuff, really messes with your head if you go deep into things like synthetic puts and calls and what not.
I'm not sure what you mean by "practical." Anything that profits is practical and any position can profit given the proper market environment. Commonly taught strategies include straddles, strangles, diagonals, vertical and horizontal spreads, condors, collars, butterflies, and ratio backspreads. Lots of different names exist for the same kinds of positions--much of it has to do with marketing and advertising by trader education firms.
Mark
lets put it into something we all use on a daily basis, some kind of food product. lets say you're anhueser busch(spelling?). one of your major costs is wheat. wheat can be traded in bushels in the futures market. say theres a prediction that there will be a huge drought in 2 years due to some crazy weather meteorologists have researched. they take this information and realize that their key cost will rise drastically if this drought does happen. so what can they do? they can buy into a futures contract that when they take delivery in 2 years, they will lock in prices and not have to worry about such a big price swing.
this kind of stuff is called hedging. you will notice alot of oil companies did this when oil was still relatively high. once those contracts ended, they started losing quite a bit of money.
airlines would use naptha/gasoline/heating oil futures to hedge against fuel prices (there isnt a future for jet fuel).
tropicana could hedge against the price of orange juice if the crops are going to be bad.
very useful instruments with a lot of practicality.
i only went into futures but what other users said about IRS' are extremely helpful for any kind of bank or insurer. options are a great way to hedge an earnings call or a product debut.
equity derivatives strategies (Originally Posted: 05/21/2011)
does anyone know what equity derivative strategies do particularly in the ib division of GS? seems like something that would be s&t but eds is in the ib division. if you could give an example i would appreciate it. thank you
please capitalize acronyms
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