Commodities and Securities Futures

"A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price"

Futures markets such as the New York Board of Trade and the Chicago Mercantile Exchange facilitate the trading of futures contracts. Futures trading is often thought of only as raw materials (commodities), however financial products or "securities" are also traded in futures markets:

Commodities: A commodity is a raw material that has value and is more or less in constant demand (think- milk, eggs, pork, beef, chicken, lumber, iron, salt, crude oil, coal, etc.).

Securities (Financial): A security is a financial product such as an interest rate, the price of a stock, the value of some kind of debt like CDOs.

A recent history of returns on commodities futures by year and type

Futures trading is simply buyers betting on the future value of some product from the sellers. In commodities this could be a day trader speculating that the price of oil is about to skyrocket and buying contracts for purchases of oil at a lower price (he/she hopes).

Remember that futures trading is not limited to commodities

In securities futures, an example would be a buyer entering a contractual agreement to purchase some amount of stock for an agreed upon price at some future date. This would be to the buyer's advantage only if the price of the stock price on the future date is higher than the price agreed to in the futures contract.

At the heart of this kind of trading (and one could argue all trading) is the idea of betting for (+) or hedging against (-) the inevitable fluctuation of future value.


Reference: https://finance.zacks.com/futures-vs-commodities-5663.html

Collateralized Debt Obligations (CDOs)

Collateralized Debt Obligations are units of packaged debt, sometimes referred to as "Frankenstein debt" which consists of various kinds of debt obligations (auto, home, credit card, student loans, corporate debt, etc.) of various credit ratings (AAA, AA, A, BBB, BB, B, CCC, CC, etc.).

"Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities." -Wikipedia

The idea behind this type of investment is that although it contains lots of high-risk debt (that may well default), that risk is offset by the better rated debt in the CDO package.

There are also CDOs known as "CDOs squared". These are also simply packages of variously rated debt, but with an additional layer of abstraction (obfuscation). Instead of various cash-backed assets and other kinds of direct claims on debt in the bundle, CDO^2 consist of pieces or "tranches" of other CDOs.

Additionally, there are Synthetic CDOs and CDSs. A Synthetic CDO is not backed by debt assets but rather derivatives of debt assets known as "Credit Default Swaps" (CDSs), which are basically CDO insurance. The buyer of a CDS makes periodic premium payments in much the same way as premiums for home and auto insurance.

CDSs provide a way for investors to hedge CDO investments. If a credit event (default on a CDO's underlying debt asset) occurs, the buyer of a credit default swap is protected from losses. If no credit event occurs, the seller of the CDS continues to collect the premium payments for the duration of the term of the CDS.

Crazy stuff, huh? Be careful, Wall Street.. Lehman Brothers never saw it coming... 😶

2008 was obviously the wake-up call, trillions in wealth vanished as values crashed to Earth