It’s hard to put a date on it, but surely it’s no more recent than (2021).
Pricing Money: A beginner's guide to money, bonds, futures and swaps
41–50 of 316 posts
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#42Earlier quoted context omitted.
Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...
Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that…
Not sure why this person is getting downvoted, these seems like fair questions.
Edit: Now get why it is downvoted, but it's fair to note that farmers represent a small (10% from what I gather here) portion of futures, so I don't know how reprensentative they are.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#43This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?
Arbitrage and it's various squishier more stochastic cousins are the vehicle by which information flows through markets. Markets exist as a global network of interactions and persistent imbalances anywhere in the system can have massive consequences. Generally, these consequences rhyme with "two counterparties which don't interact with one another directly all that often suddenly discover grave disagreements in the desired price and quantity of something they'd like to trade". Economic wreckage is the result, at least, but also imagine what would happen if corn farmers produced only half the crop that their buyers would have liked to purchase.
So, markets work pretty hard to make sure that information from one area of the global economy can flow to all of the rest of the system with relative efficiency. This works a lot like a game of telephone where changes in one market venue propagate through related instruments to other venues crossing space, species, and even time. Much like telephone, each pair of neighbors wants to do a good job sharing information without loss and, also, over long distances minor errors add up.
Arbitrage is the glue which prevents this from happening. Arbitrage says that any time anyone discovers some level of disconnection occurring, they can make money at very low risk by voting to shift markets to better align with one another.
Arbitrageurs are getting paid to provide a service to the market and subsequently the entire world. Their actions ensure that information flows throughout the global financial system quickly and without relying on centralized planning. Without them, markets could become disconnected and wander out of agreement.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#44Earlier quoted context omitted.
Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...
Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that…
It’s not just farmers. It’s useful for anything that involves future delivery of a good that could have a variable price or production.
A mining company would sell gold futures under the expectation that they will mine a known quantity of gold. They trade the risk of price fluctuations to match against their known liabilities (e.g. labor or depreciation of equipment costs).
Now replace “gold” with lithium (for electric car batteries) and you can create the greenwashed story that you want to hear.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#45Earlier quoted context omitted.
Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...
Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that…
Because it's an example you can use to explain a forward contract, which is easily understandable as a form of hedging risk. Vast amounts of the value of crops are hedged, either through forwards, futures or derivatives. Crops aren't destroyed because of hedges (in the financial sense). Indeed, the whole point is to ensure you don't need to, because you've hedged the value of your crop.
I get where you're coming from, and there's a lot which is not great in farming, but hedging values isn't one of those areas.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#46Earlier quoted context omitted.
Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that…
Not sure why this person is getting downvoted, these seems like fair questions. Edit: Now get why it is downvoted, but it's fair to note that farmers represent a small (10% from what I gather here) portion of futures, so I don't know how reprensentative they are.
They don't have anything to do with hedging. Good questions, just off-topic, which isn't something HN tends to like.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#47This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?
Without them we wouldn’t have McNuggets.
McDonald’s is known to have almost invented and streamlined cooking to industrial level. But McNuggets were made possible only through financial engineering:
https://tackletrading.com/tackle-today-the-rise-of-chicken-m...
I just finished some McNuggets so it’s even more funny to me right now.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#48This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?
The arbitrage game keeps the prices consistent with each other. It serves to create liquidity so that participants can get their business done without either waiting too long or paying too much.
Maybe this is a dumb question, but who are the participants? What is the business they need to get done? What are they waiting on?
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#49Earlier quoted context omitted.
Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...
Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that…
Ask for an example. Get an example. "That's not the example I wanted." Every time.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#50Earlier quoted context omitted.
Gotcha gotcha, that makes sense, thanks for the clear explanation! So I can see how the arbitrage (thusly defined) has the risk mitigation benefits other people talk about, can the same be said about speculation?
Sure. You mitigate risk on speculation by hedging. I'll try and give a similarly simple (if not perfectly accurate and far more lengthy) explanation. Someone mentioned farming financials in the comments around this, so we'll use that. It's also something I know well, as I know a lot of farmers. Let's imagine that a commercial farmer, whom we'll call Jeremy plants 100 acres of wheat on a farm. Market values for wheat…
> On the other hand, if he's a good farmer, and the farm produces well, and he doesn't over-extend his risk on what he's committing to, he now has a fixed price contract for his goods, which isn't going to fluctuate based on time (assuming the contract is honoured - if he's worried about that, Jeremy could then buy insurance on the risk of a default on the contract
So basically a third party would step in to assure him that he'd be paid the fixed price for a small fee? Are there no repercussions if the contract isnt honored?