In message <432B89D7.CD0DFC79@hotmail.com> Pooh Bear
wrote:
>
>DevilsPGD wrote:
>
>> In message <432B709E.D5CAA6F1@hotmail.com> Pooh Bear
>> wrote:
>>
>> >
>> >DevilsPGD wrote:
>> >
>> >> In message <_kJWe.1415$Jm.38@newssvr27.news.prodigy.net> mrtravel
>> >> wrote:
>> >>
>> >> >sfb wrote:
>> >> >
>> >> >> What has credit worthiness have to do with it? The seller of the hedge
>> >> >> isn't extending credit. The only credit question is whether the airlines
>> >> >> have the cash to buy the hedges today.
>> >> >
>> >> >When you buy options, you might pay upfront for the cost of the option,
>> >> >but the actual commodity isn't paid for at that time. The ability to pay
>> >> >for the commodity in the future requires creditworthiness. Options
>> >> >trading does require creditworthyness.
>> >>
>> >> Does it though? Worst case for the seller, the buyer backs out, goes
>> >> out of business or whatever, and the seller is no worse off then if the
>> >> deal was never made in the first place, right?
>> >
>> >The seller is worse off if the market price drops below that negotiated in the
>> >option.
>>
>> You misunderstand. The seller is still no worse off then if the deal
>> had never existed at all (which is essentially what would happen if the
>> company owning the option disappeared completely)
>>
>> I'm also curious about the name "option" -- Doesn't that typically mean
>> optional?
>
>No !
>
>You really don't understand the futures market one tiny bit do you ?
>
>Try this for starters.
>
>http://en.wikipedia.org/wiki/Futures_contract
Understood.
>http://en.wikipedia.org/wiki/Options
This confirms that it's only an option, so as I said, the seller is no
worse off is the buyer 1) chooses to not exercise their option, or 2)
goes out of business, or 3) is unable to exercise their option.
So if I'm not mistaken, you're agreeing with me, right?
However, lets go back to assuming the buyer is committed (that would be
a futures contract, rather then an option as implied by this thread),
assuming the product is something that the seller can easily sell on the
open market, the seller is no worse off then if the contract didn't
exist, if the buyer fails to meet their commitments.
Now obviously if the seller was counting on that money and it didn't
show up, it might financially impact them, true enough, but at the end
of the day, they can't end up worse off then if the contract didn't
exist at all.
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