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Hedging Stress

Cigars Ease the Tension for the Big Dogs on Chicago's Futures Exchanges
Alejandro Benes
From the Print Edition:
Pierce Brosnan, Nov/Dec 97

(continued from page 3)

The custom-built 6,400-square-foot home on the North Shore is where Zawaski heads after every working day in the trading pit at the Chicago Board of Trade--after taking a few detours.

"Hi, guys," Zawaski says to the attendants as he pulls into the parking lot of Sportsman's Park, a racetrack about 20 minutes away from the Board of Trade. Zawaski knows them by name. He visits the track about twice a week after a couple of hours on the trading floor.

"I go have lunch and then I usually try to be home by 3:30 every day," he says. "That's when the kids come home from school. It's a great lifestyle." Still, Zawaski says that Karen, his wife of 10 years, expects more of his time at home. "We have fights about it sometimes," he admits.

"My neighborhood in Wilmette is right near Northwestern [University]. Our neighborhood is populated with all these MBAs from Northwestern. They leave at six in the morning and come home at six at night," Zawaski says, building up to the argument he uses with his wife. "I go, 'Hey, you want me to go get a job where I'm going 12 hours a day and then hit the couch because I'm so exhausted?' That's my retort, which isn't too much. It doesn't fly." He laughs.

The trade-off (isn't there always a trade-off?) for the big cars, the million-dollar-plus net worth and being able to see the kids grow up is stress. We're not talking about "I'm-an-hour-late-for-the-big-meeting" kind of stress. What Zawaski and his colleagues go through every day is the kind of stress that comes from putting everything you own and have worked for on the line. If you win, you get the big house in Wilmette, you play 50 rounds of golf every summer, and you take vacations at the Ocean Club on Paradise Island where you bet an average of $576 on each hand of black-jack and see Kevin Costner having breakfast with Sean Connery. If you lose, you are out what most people would consider a year's salary. Or worse.

"For every winner there's a loser. All these clichés work. But down there they're not clichés," Zawaski says about the trading pits, adding that fear is a constant on each of Chicago's three exchanges. "I saw one guy about a year ago, froze on some order. Lost about a million dollars. A million bucks, just like that." He snaps his fingers. "He froze. He froze for an hour. Once he missed [the trade] he realized, 'I'm in shit. I'm in trouble.'"

Because of his long experience, Zawaski, whose daily trading exposure is generally between $20,000 and $30,000, now makes money about eight days out of 10.

"As you get better, the more money you make, the less risk you want to take. So you're working less hours," Zawaski says, adding that there is tremendous competition among the traders. "The stress of standing there is just absolutely incredible. I mean, it just pours on you, it just beats down on you, and I can't take it. Massive, huge split-second decisions." That's why Zawaski tries not to spend too many hours in the pit.

The Chicago Board of Trade, the world's oldest and largest futures and options exchange, defines itself as the global leader of the "risk management industry." When the CBOT was established in 1848, trading was limited to agricultural commodities. In 1975, the CBOT inaugurated financial contracts and, in 1982, options on futures contracts. Chicago is host not only to the CBOT, but also the Chicago Board of Options Exchange (CBOE) and the Chicago Mercantile Exchange. The trading dynamics are fundamentally the same at all the exchanges, the major difference being the commodities or financial instruments they trade. The common function of the three exchanges is to provide a hedge for risk. Hedging is essentially the transfer of risk. Hedgers are the ones sloughing off their price risk to speculators willing to absorb and manage the risk. The traders speculate, using futures contracts and options, that the price of commodities or financial instruments will move.

Suppose a soybean distributor suspects the price of soybeans is going to rise precipitously in the near future. To protect himself he can buy a futures contract on soybeans that will be delivered in six months. The price he agrees to today will be the price he pays in six months, regardless of fluctuations in the value of that commodity. By locking in a price in advance, he effectively protects himself against crop failures or other calamities that would drive the price up and affect his profit margin. At the same time, the farmer who sells him that futures contract is agreeing to supply beans at that price. This allows him to plant the beans, secure in the knowledge that he will have a buyer at a certain price, even if the price falls in the interim.

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