≈ I’m Lovin’ It. ≈
The financial markets still have enough place for creativity, for sure. Although most people like to shoot for the big gains while others love to shoot for modest ones in low-risk strategies, our day-to-day trading office can still be considered a fertile soil for experimentations. Until the machines take over, obviously.
In 1973, a 24-year-old kid graduated from Harvard Business School with an expertise in trading commodities. He worked for two years on Wall Street until he created his fund out of his own apartment in 1975.
At that time, this kid had two clients: McDonald’s and a chicken producer. The former wanted to add a chicken nugget to the menu. The latter was not able to hold the price of poultry still: high volatility was a killer during those years. If McDonald’s set a fixed menu price and the chicken price skyrocketed, margins would be squeezed in a way that could make the new menu item unviable.
In 1850, Frédéric Bastiat published an essay titled “Ce qu’on voit et ce qu’on ne voit pas”, “That Which We See and That Which We Do Not See” in English, commonly known as “The Parable of the Broken Window”.
The kid was bright and figured out a solution based on that which we do not see:
Full-grown chicken = Baby chick + Corn + Soymeal
The problem was not the price of the chicken, but the grains. The kid suggested combining them into a synthetic future contract that would hedge the producer’s exposure to price fluctuations.
The idea worked brilliantly and in 1983 the Chicken McNugget was created.
Ray Dalio was the name of the kid and Bridgewater was the name of the fund he created out of his own apartment.
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