Re: [Lingo] FX

["Stephen J. Turnbull" <stephen@example.com>]

s smith writes:

 > > in Japanese GAAP

Note that "Japanese GAAP" is an oxymoron.  Every company does it
differently (taxes don't count; tax rules are different from "GAAP" --
whatever it's called in a given country -- in every country I know
of), and AFAIK even rounding is (legally) subject to negotiation (in
practice, the "3 or 7 rule" is used).

 > Ah -- now it starts to make sense.  We're talking about currency 
 > speculation, then.

Yes.

 > Do they actually buy the money or buy options to buy the money or
 > both?

Speculators deal in options or futures, because those instruments
allow buying on margin.

 > Seems to me one of the big banks (UBS?) lost a few billion
 > dollars a few months back betting on the swiss frank.

Could be.  They made it back on volume, though. :-)

 > I received a note from someone looking for a perl programmer to work on 
 > a site allowed users to bet on stocks, as if the market itself wasn't a 
 > big enough gamble.  To me these seem like really strange times...

People have always gambled, and probably always will.  There are
people who believe that there are systems to win at Takarakuji (there
actually is a guaranteed way to win at Takarukuji, but it doesn't
involve buying any tickets! aka write a book on how to win at
Takarakuji) and roulette (can you spell "martingale", children? I knew
you could! -- there is of course a guaranteed way to win at roulette
-- be the house!)  It's just a question of convincing yourself you're
smarter than a random number, or (in a few cases) being willing to
live high or low, but detesting the middle class.

"The market" (as in "the stock market"), however, is not necessarily a
gamble in the sense of speculation.  Historically, the stock market on
average rises by nearly 15% a year after inflation in the U.S., and
I'm talking about post-Civil War to the present day history, not the
Internet bubble years, and I'm including the Great Crash of 1929 as
well as Black Friday of 1987.  Of course real people have a 20-year or
so horizon, not 150, but the (very real!) risks of the stock market
can be almost entirely mitigated by careful planning and choice of the
right mix of instruments (eg, index funds).

Options and futures (in general, derivative instruments) can be
extremely helpful to the market economy.  For example, the historical
justification economists give for government intervention in
agricultural markets is the volatility of prices, which is too great
for the small farmers to bear.  But add a futures market, and better
yet futures *and* options markets, and farmers can tailor an insurance
policy to their own taste for risk, and the government can get out.

Of course farmers hate that idea, because they'd have to pay for that
insurance: buying a put option to insure you never receive less than
so many yen per tonne costs real money.  In actual practice they vote
as a block, and their representatives ensure that the farmers don't
pay for their insurance, we do (and in all countries I know of we pay
for their TVs and their kids' college educations too!)