utures.tradingcharts.com; created with SuperCharts by Omega Research 䉷 1997.
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Knowing Your Market
F I G U R E 3 . 9 . W H E AT — M A R C H 2 0 0 8 C O N T R A C T
Source: Charts provided courtesy of TradingCharts.com: http://futures.tradingcharts.com; created with SuperCharts by Omega Research 䉷 1997.
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4
RISK LEVELS OF FUTURES
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isk appears to be such a basic concept that many investors andtraders overlook it. Identifying a portfolio as ‘‘diversiﬁed’’ does notnecessarily mean that it is; and when people call themselves ‘‘conservative’’ but then speculate wildly on long shots, it makes thepoint: Truly understanding risk requires a sincere effort to matchpersonal risk tolerance and investing goals with a range of appropriate products.Investors who analyze risk know that:1. There is an important difference between investing and trading.The investor tends to buy stocks and other products with theidea of holding those positions open for some period of time.That may be weeks or months, but more likely it is years. Thosewho buy real estate invest for the long term, deﬁned as ﬁve yearsor more, perhaps the remainder of a person’s life. Stockholdersmay be ‘‘value investors,’’ meaning they seek well managed, superior companies available at a discount, buy stock, and holdfor the long term. Some value investment experts suggest buying such stocks and then forgetting about them for many years.This may not be wise because, increasingly, market and53
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Knowing Your Market
company-speciﬁc status changes rapidly in the global economyand the Internet age. Some other investors seek ‘‘growthstocks,’’ which are generally thought to be those most likely tooutpace the market as a whole and produce superior returns.Investors tend to be more conservative than traders. If youare a trader, you are likely to work with options or highly volatilestocks, or to trade futures directly. Traders accept higher levelsof risk. A good balance between investing and trading is foundin ETFs and indices, where it is possible to invest long-term,even in traditionally short-term products like futures contracts.2. Risk and opportunity are two sides of one coin. The degree ofrisk is directly connected to the opportunity for proﬁt. Manytraders tend to focus on proﬁt potential alone, often ignoringrisk and simply hoping to beat the odds. It is true that whenplaying poker, you can occasionally bluff and win a pot with aterrible hand; in trading, this is much less likely. The key tosuccessful trading is to create proﬁts consistently, because beating the averages is impossible unless you employ a smart system. So low risk is married to low proﬁt potential but a highlevel of safety; and if you go for high returns, you also need toaccept higher than average risks.3. Risk comes in many forms. It is easy to think of risk as a singularattribute of a company or product. But in fact, there are manydifferent forms of risk. The best known of these is market risk,which is simply the risk that the market value of an investmentwill decline. But as this chapter demonstrates, risk is varied andmultifaceted.Knowledge risk is most often overlooked, especially in complexmarkets such as futures or options. You need to know the potentialrisks as well as potential proﬁts, and also to appreciate the specialtrading rules and regulations, jargon, and technical tendencies ofcomplex products. In addition, you cannot ignore diversiﬁcation,interest, liquidity, leverage, and lost opportunity risk.In the futures market, one type of risk that does not affect othermarkets as seriously is systematic risk, also called political risk. Forexample, if major conﬂicts in the Middle East curtail oil production
Risk Levels of Futures
55
or delivery, oil futures prices are likely to rise as a consequence.Political unrest in Asia may affect rice production and, as a result,futures prices; and similar systematic risks in many parts of theworld can also affect coffee prices. This special kind of risk is morelikely to affect futures contracts than many stocks, mutual funds,or real estate investments.
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The Nature of RiskAll definitions of risk have to include the comparison of risk on twolevels. First is that between risk and opportunity. The greater theopportunity, the greater the risk, and the smaller the opportunity,the smaller the risk. So if you are very conservative and you wantto protect your capital—which is called the goal of ‘‘capital preservation’’—then you have to be willing to accept smaller potentialreturns. Rather than chasing double-digit returns in some very volatile markets, you need to select very safe but low-yielding alternatives. For example, you can get an insured certificate of deposityielding very low rates, but with virtual certainty that your moneywill be protected. The problem with low yields is that the combinedeffects of inflation and taxes may result in an after-tax lower value.The second way to compare risks is to compare your personalrisk tolerance with your financial objectives. Risk tolerance simplymeans the amount of risk that you can afford to take. If you cannotafford to lose any money from your portfolio, you should have yourmoney in very safe investments. But if you can afford to takechances, then more volatile markets offering potentially greaterrates of return could be appropriate for you. Your financial objectives also come into play, and that involves many considerations:income, available capital, age, knowledge of the markets, and number of years until your planned retirement.Risk is widely misunderstood and mischaracterized in the markets. For example, you may hear that a particular investment is‘‘risk-free.’’ There is no such thing. In some market conditions,people have convinced themselves that it is impossible to losemoney investing in real estate. This false premise contributedlargely to the problems in many housing markets beginning in
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Knowing Your Market
2006. With excessive lending and poorly structured loan policies,many mistakes were made—zero-down loans, 125% equity loans,stated loans, and teaser rates in sub-prime packages. All of thesecontributed to the speculative abuses in real estate, proving that infact, this market has a lot of risk.Now consider the opposite end of the spectrum, the extremely‘‘safe’’ investment. You can get a guaranteed rate of return in aninsured account in a savings institution, but is that investment actually safe? If both inflation and taxes reduce your gross return to thepoint that you do not break even on an after-tax basis, you arelosing.To calculate your breakeven return, divide the current rate ofinflation by your after-tax annual income. For the rate of inflation,you may use the Consumer Price Index (CPI), which you can findat the federal Bureau of Labor Statistics’ Web site, www.bls.gov/cpi. Your after-tax rate of return is your income after deductingthe effective tax rate for both federal and state income. This is thepercentage of tax you are assessed based on your taxable income.For example, if your effective tax rate on your federal return is 28%and your state’s rate is 8%, your combined tax rate is 36%. Thismeans that your net after-tax income is 64%. So if you assume thecurrent inflation rate is 3%, you would calculate breakeven as follows: divide 3% by the net after-tax income of 64%. You need toearn 4.7% just to break even. Figure 4-1 shows the formula forcalculating the required breakeven rate.Table 4-1 shows a summary of rates you must earn to breakeven—assuming various rates of inflation and combined federaland state tax rates.For example, if you assume 4% inflation and your combinedfederal and state income tax rates are 38%, you need to get a 6.5%return just to break even. This would not be an exceptionally hightax rate, when you consider the levels of tax in many states. Forexample, current federal rates can be as high as 35%. State taxescan be high as well, with Utah the highest at 9.5%. Combined withthe maximum federal rate of 35%, your combined rate could be44.5% of taxable income. Other high tax states include California(9.3% maximum), Iowa (8.98%), and New Jersey (8.97%).
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Risk Levels of FuturesFIGURE 4.1. BREAKEVEN RETURN
breakeven return
I= B100 – R
where I ⳱ rate of inﬂationR ⳱ effective federal and state tax rateB ⳱ breakeven return.
TAB L E 4 . 1 . B R E A K E V E N R AT E S
INFLATION RATEEffective tax rate
1%
2%
3%
4%
5%
6%
14%16%18%20%22%
1.2%1.21.21.31.3
2.3%2.42.42.52.6
3.5%3.63.73.83.8
4.7%4.84.95.05.1
5.8%6.06.16.36.4
7.0%7.17.37.57.7
24%26%28%30%32%
1.3%1.41.41.41.5
2.6%2.72.82.92.9
3.9%4.14.24.34.4
5.3%5.45.65.75.9
6.6%6.86.97.17.4
7.9%8.18.38.68.8
34%36%38%40%42%
1.5%1.61.61.71.7
3.0%3.13.23.33.4
4.5%4.74.85.05.2
6.1%6.36.56.76.9
7.6%7.88.18.38.6
9.1%9.49.710.010.3
44%46%48%50%52%
1.8%1.91.92.02.1
3.6%3.73.84.04.2
5.4%5.65.86.06.3
7.1%7.47.78.08.3
8.9%9.39.610.010.4
10.7%11.111.512.012.5
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Knowing Your Market
Valuable Resource: The IRS Web site (www.irs.gov/formspubs/article/0,,id⳱150856,00.html) lists current federal tax rates. A listing of stateincome tax rates is at www.taxadmin.org/fta/rate/ind_inc.html.
You may think of the combined effects as inflation/tax risk,something often invisible but all too real. You might think you’redoing well with that 5% or 6% return on your investments, only todiscover that you are losing purchasing power over time due toinflation and taxes. This reality also points out the flaw in seekinglow-yielding, highly safe investments. That safety may come at aprice, a net after inflation/tax loss.So risk cannot be isolated from opportunity. This is the realityyou face in all types of markets. The solution for most people is tofigure out a way to create acceptable risk levels in their portfolios,in order to generate needed rates of return. For many, simply preserving the net purchasing power of their money is good enough;for others, investing is a way to earn more and even to get rich. Thespeculator hopes to beat the averages by exceeding the averages,and a lot of energy is put into trying to find the right system.Whether that even exists is debatable.
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Your Personal Risk ProfileBefore deciding whether any market is appropriate, you need todefine your own risk profile. This involves analysis of risk levels aswell as personal risk tolerance and investing objectives. A lot ofenergy is expended in this effort, often by financial planners andadvisors trying to create programs for clients. Realistically, manyplanners are simply commission-based salespeople who use the financial planning process as a sales tool. In the final analysis, eachperson is responsible for developing these definitions. A qualifiedfinancial professional can be helpful by asking the right questions;but ultimately, you have to keep in mind several qualifications:1. Defining your risk profile is useful only if it leads to specific investing limits and alternatives. You can and should work on yourown personal risk profile. However, it is not enough to defineyourself as ‘‘conservative’’ or ‘‘moderate’’ when it comes to your
Risk Levels of Futures
59
investing requirements. You need to develop a list of investmentalternatives that fit or do not fit your profile. For example, a verycautious person may want to avoid options or directly ownedfutures, focusing on blue-chip stocks yielding good dividends,or employing mutual funds and ETFs. Within the ETF or indexfund world, it may be appropriate to focus on commodities or aspecific market sector. The point is that you cannot know whereto invest your money until you know how much opportunity/risk is appropriate for you.2. The risk profile has to be followed and respected to be effective.Many people describe themselves as ‘‘value investors’’ or ‘‘conservative’’ and then go out and speculate wildly with futures,options, or volatile stocks. When they lose money, they are puzzled. But the reason is clear. If a person does not adhere to awell-defined risk profile, there is no discipline within the portfolio, and no program of progressive investing can be expected.In a well-defined risk profile, profit or loss occurs at expectedlevels and at acceptable levels.3. Risk profiles change continually, so you need to review and update as your life changes. The major events in your life affect andalter your risk profile. The most obvious change is improvedknowledge and experience as an investor, because expanded information tends to broaden your potential markets, but this isonly one aspect of a life change. More important are events likemarriage, having a child, buying a home, divorce, poor health,a child’s college education, beginning a new career, changes inincome level, losing a job, starting a business, and poor healthor death of a family member. Each of these changes creates anentirely new risk profile. That means that investment plans youhad a few years ago probably do not work any longer, not onlybecause your knowledge and experience have grown but alsobecause your financial and personal circumstances havechanged as well. These changes require adjustments to insurance (life, health, disability, auto, homeowners) as well as to themix of investments you hold in your portfolio. A young singleperson can afford to speculate and even to take losses, but ahead of household on a tight budget has to select investments
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Knowing Your Market
that are not going to lose. The overall portfolio, including a family home, savings, and retirement plans, and a portfolio involving stocks, bonds, and potentially futures, can be structured inmany ways. For those who are most conservative, pooled investments like mutual funds, index funds, and ETFs are quite appealing. For the more experienced investor (or for conservativeinvestors willing to diversify their portfolios into individual issues) some direct ownership is appropriate as well. It is not thesame for everyone; designing a portfolio has to be based on (a)specific current risk profile, (b) personal risk tolerance, and (c)knowledge about each market under consideration.4. The risk profile and risk tolerance levels are not the whole story.In addition to defining yourself in terms of experience, knowledge, capability, and personal preferences, you also need to assess markets and market conditions. All markets are in a neverending state of change. This means that all products—stocks,futures contracts, real estate—are in a constant state of movement. So even after you have defined appropriate markets andproducts, you also need to study and track specific markets. Sorisk is never going to remain the same in every condition. Youmight hear it said that ‘‘the futures market is too risky,’’ but thisis not the same at all times. First of all, buying a futures ETFis not as risky as buying a specific futures contract, based ondiversification. In addition, markets are changing constantly. Atsome times, agricultural futures are weak and energy futuresare strong. These situations may evolve and reverse status overtime. Stocks may also be strong or weak, and specific stocksectors change as well. In 2007, the energy sector was the strongest and financial and housing sectors were the weakest. In pastyears (and surely in future years), those weak sectors were market leaders. To set your portfolio properly, you need to defineyour personal risk profile and review it continuously, and alsoto evaluate current market conditions for the various marketsthat interest you. If one is weak today, just wait a few months.The cycles never stop moving.
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Futures to Hedge Other Market RisksThe concept of ‘‘risk transference’’ takes on a lot of meaning whenyou analyze the futures market. The market was created to transfer
Risk Levels of Futures
61
risk between producers and buyers, providing some assurances andcertainty on both sides. The buyer uses futures contracts to guarantee a market and a price for a commodity. Thus, if there are fewbuyers and an abundance of a crop, the futures contract transfersthe producer’s risk to the buyer. And the buyer also benefits. Ifthere is a poor crop and scarce commodities one year, prices willsoar. But owning a futures contract fixes the price so that the buyeralso has certainty. Because the market price trend can go eitherway, both sides benefit from this basic form of risk transference.The concept applies to other markets as well. Futures contractsare used to protect one position against another. For example, financial institutions are very sensitive to changes in interest rates,and if rates go up so does the cost of lending money. Likewise, ifrates go down, existing mortgages and other loans will be replacedwith lower-rate debt. So as interest rates (the price of money) areuncertain, financial institutions can use interest futures to protecttheir markets in the coming year.Hedging between stocks and commodities is also common. Forexample, a speculator might be long on the energy sector whilegoing short on energy futures, or vice versa. One position offsetsthe other, so that an unexpectedly large price swing will help avoidlarge losses. The majority of hedging activity of this type is goingto occur in the futures market, meaning trading in the contract. Incomparison, some use the cash market as a hedge. This refers toactual commodities apart from the futures market. Whereas thefutures contract involves a contractual right, the cash market involves buying and selling of agricultural products, precious metals,livestock, or financial products.So hedging in one respect refers to fixing future prices in thecash market. A jeweler wants to buy a quantity of gold, or a growerneeds corn; so the contract is used to fix the price in the immediatefuture. For most investors not interested in getting 40,000 poundsof anything, hedging is going to occur strictly in the contract itself.Exchange members transact futures contract trades, as opposed toactual producers and users in the cash market. This futures exchange market is accessed through a series of clearinghouses, indices, or ETFs used by traders.Hedging within the futures market enables individuals to applysignificant leverage. You can control a large amount of a commod-
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Knowing Your Market
ity for relatively low risks and, if you trade through a pooled investment, for relatively little risk. Hedging may be long (involving thepurchase of contracts when you expect prices to rise) or short(when you sell futures contracts expecting prices to fall).Successful hedging must involve an understanding of howmarkets interact and perform. For example, many stock-based fundamentals (earnings and revenue, dividend yield, P/E ratio, competitive factors) affect stock prices outside of any futures contractsor cash prices. At the same time, the underlying commodity isgoing to react to price competition and supply and demand. Forexample, energy futures contracts are going to rise or fall based onlevels of the Strategic Petroleum Reserve, OPC policies andchanges, and political sensitivities. When former Prime Minister ofPakistan Benazir Bhutto was assassinated at the end of December2007, oil futures prices rose within two days from $93 to $97 perbarrel before retreating somewhat. The point is, futures prices aregoing to be highly reactive to political events or so-called systematicrisk. Figure 4-2 summarizes the two-day record of oil prices, reflected on December 27 and 28, 2007, in the February contract forlight crude oil (CLG). (The futures contract for light crude oil is‘‘CL,’’ and the February contract is identified with ‘‘G.’’)Notice how the price spiked on December 27 and 28. Pricesthen fell quickly back from $98 per barrel down to $96. This istypical of a short-term reaction to systematic news. The tendencyis for prices to react very quickly and then to return to ‘‘normal’’trading levels based on the previous trading range.Even short-term price movement does not always work efficiently. Hedgers recognize the fact that futures and cash prices donot always change to the same degree. This opens up the potentialfor making hedge transactions. But this is only appropriate forspeculators or for those who understand the nature of the futuresmarket versus the cash market. A hedge of this type may easily beunbalanced, because you cannot divide a futures contract. So atrade in such a contract is for 100% of the minimum unit size.Thus, the cash position and futures position will not always be unified; you may need to underhedge or overhedge your positions.It is also possible to hedge between commodities. For example,palm oil and soybean oil can be hedged against one another. In the
Risk Levels of Futures
63
FIGURE 4.2. LIGHT CRUDE OIL FEBRUARY CONTRACT, DECEMBER 27 AND28, 2007
Source: Charts provided courtesy of TradingCharts.com: http//futures.tradingcharts.com; created with SuperCharts by Omega Research 䉷 1997.
emerging market for ethanol, it is also likely that ethanol futurescould be hedged against light sweet crude or even against cornprices. If you appreciate the interaction between two different commodities, many hedging opportunities can be identified. However,you also need to ensure that you know the risks involved in offsetting long and short positions.A ratio hedge is another version. When the cash and futuresprice are relatively far apart, loading up one side of the hedge canmake sense, anticipating that the gap is going to close as deliverydate approaches. You can use futures in many of the same ways thatstock traders use options, and the ratio hedge can be very similar tothe stock-based options ratio write. In that transaction, a ratio maybe higher or lower than the number of 100-lot shares. For example,if you own 400 shares and write five calls against the position, itcreates a ratio write. It can be viewed as four covered calls and one
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Knowing Your Market
naked, or as a 5-to-4 ratio write. In futures contracts, a similarhedging occurs between cash and futures prices, and the risks aresimilar. But the relationship between cash and futures prices maybe more difficult to understand than the relationship between stockprice and option premium levels.
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Knowledge and Familiarity RiskAs the previous section demonstrates, the level of knowledge abouta market and its strategies determine appropriate and inappropriate strategies. If you do not understand how futures hedgingworks, you are not alone. It makes no sense, though, to expectyourself to place capital at risk without thoroughly understandingthe mechanics of the trade and the level of risk involved.The two-part risk of knowledge and familiarity work togetherto target specific markets and strategies that can work for you. Forexample, you might be very familiar with real estate because youown a house. Thus, you know all about mortgage amortization, fireinsurance, and maintenance. This does not mean you will also befamiliar with the investment aspects or risks of becoming a landlord. The intricacies of working with tenants, qualifying for mortgages for nonoccupied homes, and managing investment propertycash flow are entirely apart from your knowledge as a homeowner.Taking this comparison to another level, even if you are knowledgeable about and familiar with residential investment property, thatdoes not mean you also understand the market for commercial,industrial, or lodging investments. These markets all contain separate and distinct levels of risk, because the attributes of a ‘‘good’’versus ‘‘bad’’ investment are going to be based on market trendscompletely different than those for residential properties.In the stock market, you are probably very well versed in mutual funds and many different market sectors. But familiarity withretail, energy, and financial sectors does not mean you also havefamiliarity or knowledge concerning biotech or defense sectors. Infact, it is reasonable to point out that not all stocks are the samesince each sector contains its own unique and different risks. Manypeople assume that knowledge about fundamental and technicalanalysis is enough to pick stocks. Merely applying a few criteria
Risk Levels of Futures
65
indicate strength and weakness, safety and risk, and profit or loss.However, given the market cycles for each sector, this is not alwaystrue.You need both knowledge and familiarity on many levels toavoid the risk of making mistakes. The levels include broad marketswith their special trading rules, jargon, and limitations; market sectors and their economic cycles; and individual companies, issuers,or commodities with their own market positions and interactions.For example, a market leader such as ExxonMobil, McDonald’s, orMicrosoft defines one attribute. You may want to invest in the company that dominates its industry. In futures contracts, the samerules apply. Just as McDonald’s stock interacts with Burger King,numerous interactions occur between and among commodities.Consider the interaction between corn and ethanol, or between interest rate futures and currency exchange rate futures. These aredirectly related due to economic cause and effect in the markets.You should never study or evaluate one futures contract, or stockor bond, or other investment product in isolation.The trends in energy prices affect McDonald’s stock value, because the company relies on delivery, meaning trucks, which inturn has everything to do with fuel costs. So rising energy pricesultimately also mean higher prices at the golden arches, or lowersales volume, or both. For the astute trader observing the interaction of these different markets, some opportunities become apparent. However, before you are prepared to take advantage of theeconomic and cyclical trends, you need to be completely knowledgeable about how those markets work; and familiar with the risksand potential rewards they entail.
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Market RiskThe best-known and understood of all risks is market risk. Simplyput, this is the risk that price will move in an opposite directionthan what you desire. Many people who buy any investment product make the basic error of assuming that their entry price represents a ‘‘zero point’’ in the price trend. So you buy stock at $40 pershare expecting it to rise, but forgetting that it can also fall. In thisexample, an investor has ignored market risk.
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Knowing Your Market
A short seller takes the opposite version of a ‘‘zero point’’ strategy. Because a sell order is an opening phase, the short seller expects price to fall. If this is not the case, price will rise and theshort position loses out. This is true in stocks as well as in futurescontracts. If you track the futures price trend, you see that most ofthe action occurs in the contract one out from the next deliverydate. Price estimates of futures traders are continually in flux, andthe further out, the more uncertainty in price levels. If you take ashort position in a futures contract, you can always roll forward toa later delivery date. But what happens if the price of the underlyingcommodity just continues to rise? At some point, you can no longersustain your short position. So in this instance, ignoring the marketrisk could cause a considerable net loss in the position, not to mention tying up margin account levels for the indefinite future. Evenif you short through indices or ETFs, you should not ignore marketrisk because it exists for every long and short position.Until you understand how markets move to the point whererisks can be fully appreciated, short positions (whether through direct or pooled venues) can be quite risky. Just as a novice stockinvestor is discouraged from shorting stock due to risk levels involved, a newcomer to the futures market needs to spend time becoming familiar with the markets as a first step.Market risk applies to all markets and even to fully diversifiedportfolios. In stocks as well as in commodities, general economictrends tend to affect entire markets. So commodity prices are likelyto ‘‘tend to trend’’ in the same direction. As prices rise due to inflation or a weakened U.S. dollar, commodity prices are likely tomove generally in the same direction. You cannot study or analyzeany commodity in isolation from the overall market or from thebroader, longer-term economic trend.Stock market investors have known this for a long time. A historically consistent growth in prices have pampered real estate investors, so when prices stop growing or fall, there is a tendencyto think the entire economy will come crashing down. But 2007demonstrated that even when a major sector like the financial sector is soft, even when housing is weak and banks and brokeragesare losing price value, the overall economy can remain strong andin an upward trend. In the futures market, the interaction between
Risk Levels of Futures
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commodities and stocks is obvious and can be witnessed by comparing sector ETFs or index funds with commodity prices. But ona more permanent level, futures trends increasingly reflect trendsin the global market as well. In the past, distinctions were madebetween domestic and import markets. Today, while balance oftrade continues to be used as one of many economic indicators, theeconomy has become truly global and futures prices are no longerdistinguished by country or by region. Thus, market risk has alsobecome global in nature, a reality that affects how futures tradingtakes place today and in the future.
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Systematic and Lost Opportunity RisksWorld events are very troubling to futures traders in the UnitedStates because they are beyond the control of the individual andeven of the markets. Even the U.S. government, with its politicalpower, has little to say about OPEC-based decisions regarding production, refinery levels, or oil prices. While domestic agriculture isvery productive, the United States imports some agricultural products and exports others. And many basic materials are imported aswell, such as coffee, for example.Global systematic risk, mostly beyond the control of an exchange, an individual company, or any one government, definitelyaffects futures price levels. World political events, especially disasters or volatility in another country, have immediate impact on futures prices.This reality is both a negative and a potentially positive reality.It is negative because such political events are beyond our controland many commodities come from areas that are very unstable.The Middle East, where a large portion of oil is generated, has beenunstable for many decades without signs of improvement. In fact,conditions there have only worsened in recent years. But this canbe positive as well. Prices reflect instability and the potential fordrastic price changes. Recognizing this, even the most systematically sensitive commodity is likely to trade with great volatility. Forthe futures speculator willing to take on the risks, this realizationpoints the way to profit potential. The risk of political uncertaintyrepresents an equally volatile opportunity. This means that uncer-
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Knowing Your Market
tainty may discount the futures contract in a specific area due tothis unknown systematic risk, but at the same time it presents anopportunity for great profits due to the same influences.Closely related to systematic risk is another variety, known aslost opportunity risk. In terms of the futures market, this refers tothe backward-looking realization that some event or series ofevents led up to price movement. If only you had been hedged intoa position in a commodity, you would have made a profit if andwhen the