It was a whirlwind issue when the news on the SEC charging Goldman Sachs with fraud involving a high ranking executive with regards to CDOs and the even mentioning Paulson's Hedge fund company in the process. The bottom line on risk disclosure was the main element of the case as investors were not informed of the counter party's of such investments when offered during the period. In essence, every possible deal involving in the stocks , derivatives offerings were all angles should be properly disclosed. In Paulson's case; he simply found and perceived the failure of the financial system that led him to short the market through the Credit defaults market where there are not a lot of regular retail investors would have access to.
To make this issue as simple as possible, trading investments that involves buying and selling financial instruments as always shows both sides of the coin. For every buyer there should always be a corresponding seller. Market makers who make these all possible are institutional banks, other highly sophisticated companies as well as hedge fund managers, traders, private investors and other speculative investors who take the risk and manage to come up with strategies and money management / allocations to spread and hedge investment portfolio in both sides of the market. Conditions and market sentiments overwhelmingly prevail in such cases where one may and may not perceive what the outcome may be or when it can take place.
these common scenarios take place in almost all markets whether they be in stocks, foreign exchange market, commodities, derivatives and other financial instruments for that matter.
In " Offsetting Transactions " as most strategist, investors and sophisticated traders do manage to place such trading styles as to simply minimize the risk of loss on the investments over a period of time. However, such strategies done in line with the time frames should always be flexible that gears towards market conditions and could be changed from time to time as the market goes along influenced by other market fundamentals.
Also in the case of the Foreign Exchange trading, managing risk similar to these " offsetting Transactions can be utilized and implemented based on the level and degree of knowledge and sophistication a strategist or trader can apply based solely on their main financial objectives.
There are several ways of trading the Forex market from Spot/Cash market, USD/Foreign base currency trading, financial futures, options, derivatives, forwards and swaps just to name a few. But how to properly manage a few combination would simply be involving a pretty huge sum of money to implement such strategies. And the probability/ ratio of winning against losses are calculated based on given facts and assumptions.
For all intents and purposes; these information's are actually available but needs a lot more due diligence, research and information gathering from reliable sources. The strategies could be made and similar applications can also be fashioned the same way to offset, minimize and try to equalize the risk of loss through proper hedging; not simply on a buy and sell trades in the FX market. But by utilizing all possible markets accessible to the investors.
However, for retail and smaller types of investments it would be very difficult to maintain many positions. So using the leverage as a means of spreading the risk is vital for the trade. Since the level of playing fields presented by some broker-dealers are limited and leaves the investors on a simple trade of buying and selling their favorite currency or commodity in the market.
Goldman Sachs, as big as they are and other financial institutions do have a variety of options or other services at their disposal depending on the criteria and needs of its clients. So if Paulson's company didn't come up with that idea and trading plan of shorting the market through credit defaults then this would not have happened. Perception as to how the financial markets will eventually end up is simply making the choice whether its going up or it going down.
So please make your choices right. It can only help to do due diligence research on any investments!
Good Luck and Happy trading!
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