10 lessons
The Market Maker's Hedge (and the Gamma Squeeze)
When you buy a call option, someone must hedge it, and that hedging is what sent GameStop vertical.
Futures Margin: The Daily Cash Machine
A futures contract is not paid for up front and never carries a loss overnight. Every single evening the clearing house tears the trade up, re-prices it, and moves real cash between winners and losers before the next day begins.
An Interest Rate Swap, From Trade to Maturity
Two banks agree to swap a fixed rate for a floating rate, then immediately hand the deal to a third party who guarantees it and demands cash every single day for the next ten years. That third party is the whole point.
CDS: Insurance on a House You Don’t Own
A credit default swap pays out when a borrower defaults, but unlike home insurance you can buy it on a "house" you never owned. In 2008 AIG sold this protection by the hundreds of billions, never hedged it, and needed a $182bn rescue.
ISDA, CSAs and Collateral Calls: the Legal Plumbing of OTC Derivatives
Two banks can have thousands of swaps open with each other and owe just one net number. The 80-page contract that makes that possible is the same one that decided who survived Archegos.
Commodity Futures and Physical Delivery: Why Oil Went to -$37
On 20 April 2020 the price of a barrel of oil hit minus $37.63. Sellers paid buyers to take it. The reason is hiding in three words of contract small print: deliver at Cushing.
Structured Notes: Manufacturing "Capital Protection"
A bank promises you 100% of your money back plus a slice of the stock market’s upside. There is no magic. They just bought a bond and a call option, kept the difference, and put their own balance sheet on the line.
Hedging an Airline's Fuel Bill
Fuel is roughly a quarter of an airline’s costs, and the price can double in a year. So the treasury team buys insurance on oil it has not even burned yet, using derivatives most passengers never hear about.
Exotic Options and Barrier Events: When Hedges Become Cliffs
A barrier option is cheap because it can vanish. Touch one price level and the payoff you paid for disappears, or springs to life. Near that level, the hedge that protected you all year flips to its opposite in a single tick.
Volatility as an Asset: the VIX and How Short-Vol Blew Up in 2018
The VIX is not a price you can buy, it is the square root of the market’s expected variance. On 5 February 2018 a crowded bet that it would stay calm vaporised $3bn of funds in a single afternoon.