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A trader has countless financial instruments available, from shares to futures, using tools such as digital options, certificates or ETFs.
It is essential to know all tools before engaging in a discussion on operational techniques, partly because each instrument has its own inherent risk and combining two different financial instruments amongst them can be devastating.
Sometimes reality exceeds fiction, as in the case of a rogue trader operating at the oldest merchant bank in the United Kingdom, the Barings Bank. Its collapse is due to a single trader, Nick Leeson, who created a huge loss trying to support the Japanese Nikkei index buying futures and selling put options at the same time, without the bank being aware of it.
He was buying risk by paying it off with hope.
To avoid a similar fate, a trader must know the financial instruments and the risks connected to them. Once he knows and understands the risks, the selection and use of financial instruments will turn certain and, for sure, most profitable.
One last thing on hasty investments with unbudgeted risks: look at the bond depicted on this page. Russia financed war efforts with war bond certificates. In 1944, the conflict’s fate was sealed, and the risk of insolvency the underwriter was running was very high, too.
What lesson can be drawn from history?
Simply that in trading, as well as in life, the only thing certain is uncertainty. Rest assured!
- To follow a logical thread you may click on "Financial Instruments sequential index” where entries are grouped by chapters as in a book.
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