Your Questions About Hedgers

landscapeliving answers:

Of course there are.

Read their prospectuses to find out if they invest in derivatives.

One company that does this is Smith-Breeden. They used to have a fund that tracked the S&P where they invested money in Mortgage Backed Securities. They would then use derivatives to hedge the interest rate risk, and then use futures contracts on the S&P to give the fund a beta of one.

landscapeliving answers:

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To make money.

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Buying options limits your downside risk to 100% of your investment.
Buying a commodity limits your downside risk to to 100% of your investment (plus holding costs if any).
The maximum gain from buying options is unlimited.
The maximum gain from buying a commodity is unlimited.
The only way the buying options limits your risk compared to buying the commodity is the maximum amount you can lose per unit (such as bushel, pound or barrel) is lower. However, to have the ability to make the same total profit you have to invest in more units.

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Let's look at some examples. Let's assume five investors, each with $24,000, think the price of widgets will go up. Widgets cost $80 each. There are call options available on widgets. The $75 strike price call option costs $8 per widget and the $85 strike price call option costs $3 per widget.

Alice buys 300 widgets for $24,000.
Ben buys 300 $75 call options for $2,400 and leaves the rest in the bank earning interest.
Carol buys 300 $85 call options for $900 and leaves the rest in the bank earning interest.
Dave buys 3,000 $75 call options for $24,000.
Eve buys 8,000 $85 call options for $24,000.

Assume all five hold their investment until the option expiration date.

If the price of a widget on that date is $70 all the options would expire worthless.
Alice would have lost 300 x ($80 - $70) = $3,000
Ben would have lost $2,400
Carol would have lost $900
Dave would have lost $24,000
Eve would have lost $24,000

If the price of a widget on that date is $80 the $75 options would be worth $5 each and the $85 options would expire worthless.
Alice would have broken even.
Ben would have lost 300 x ($8 - $5) = $900
Carol would have lost $900
Dave would have lost 3,000 x ($8 - $5) = $9,000
Eve would have lost $24,000

If the price of a widget on that date is $90 the $75 options would be worth $15 per widget and the $85 options would be worth $5 per widget.
Alice would have made 300 x ($90 - $80) = $3,000
Ben would have made 300 x ($15 - $8) = $2,100
Carol would have made 300 x ($5 - $3) = $600
Dave would have made 3,000 x ($15 - $8) = $21,000
Eve would have made 8,000 x ($5 - $3) = $16,000

What this example demonstrates is that

(1) If the price of underlying makes a big enough move up the options will have a higher percentage gain, but if the price stays fairly steady or drops the options will have a loss percentage greater than that of the underlying.

(2) If the same number of dollars is invested options give leverage and will usually have much greater gains or losses than an investment in the underlying,

(3) If you use the same number of units and the price goes up, the underlying will always make more dollars than an investment in the options.

In other words

(1) An investment in call options is much riskier than an equal dollar investment in the underlying but has a potential for a higher return if the price of the underlying goes up enough.

(2) An investment in call options can neither lose or make as much as an investment in an equal number of units of the underlying.

landscapeliving answers:

Sears! On line would be best. Have the model number on hand

landscapeliving answers:

Sears service.

landscapeliving answers:

What Homer Simpson said.