I just read through the first reading of derivatives and while I was reading the section on swaps - especially basis swaps, I couldn’t get gambling out of my mind?
So this type of swap is basically saying “I bet the interest on my underlying will be more than yours”? It this not similar to having the two interest rates battle and see which one is higher?
yep!.. same with forwards, futures, options. I would want to argue is isn’t “betting” however. We are not slaving away in this program to become professional gamblers. You have your short position taker and your long position taker. Both have their (hopefully) well thought out reasons for taking the position… they are not just rolling the dice! Sometimes it is much more plain than gambling when hedgers just want to lock in a certain price or rate for themselvs so they can have predictability in their future performance. In that case it is not about winning a bet but locking in stability.
It certainly can be.
In the ancient times, derivatives were created to hedge against risk. Today, derivatives are generally used as a way for profit. Of course, as any other investment you could get into, this depends on if you win or lose. At the end of the day, a forward, a swap or a future are only investments for me, not gambling at all.
Some prefer level payments and others are comfortable with variable payments.