Financial Products: The Hallmark of Intellectual Ingenuity

I have been moving form desk to desk trying to figure out what products the asset management I work for trades. I worked on Mortgage backed securities and saw the tremendous amount of effort that people make to package these loans which then are sent to the government agencies which sell pools of them in to investors,. Nothing close, in my own opinion comes to the one Im currently working on: Options!!

Options on a high level are contracts. They are a type of derivative that derives their value from an underlying asset. Consider my decision to buy 100 shares of IBM in December at 100 bucks a pop! Well, I can buy an option that would allow me to buy the shares at that time. Now here is the good stuff, when the price of IBM goes to 200 bucks, my contract still says 100 bucks; I just made 100 bucks time 100 which will be 10,000 from an initial of 10, 000; in total my portfolio is in fact worth 20,000.

However, if the market went against me, Im not obligated to buy the option but when the contract expires I just the money I used to buy the contract. These investments can be risky, but they are also interesting in that they offer something more than just buying securities and they allow for hedging of your investment. Imagine locking a house at 200,000 with an option contract to buy it three months. When the contractors are fixing the place up you find that there is oil under the house; which would mean that you own the reserves. Therefore, everything that is worth in that house would be owned by you. In this case, the owner is obligated to simply take the 200,000 thereafter allowing you to profit off the house.

Crazy product. It is actually in the Umbrella of Derivatives.