Large companies moaning about having to post collateral against over the counter derivatives have forgotten the real value of hedging, argues Philip McBride Johnson.
The year is 1859. Somewhere in pre-Great Fire Chicago, a man gestures somewhat obscenely to another gentleman and the nation’s very first futures contract is traded.
Chances are, this soon-to-be Cubs fan made the contract for a Midwestern farmer (or his grain elevator) to hedge against bad weather, bad luck or bad genes. A specific number of bushels of pretended grain were thereby created.
Odd, when you think about it. Here is a fellow who is worried about a glut of real wheat that will depress his selling price while, in response, he exacerbates the situation by inventing make-believe grain as well. Anyway, he has his price protection.
Now comes the bad news. “You owe me a commission,” says...