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Pricing Money: A beginner's guide to money, bonds, futures and swaps

jdawiseman.com

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Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#61

Post by NoboruWataya »

panarchy wrote: post #38
lolpython wrote: post #24

Earlier 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…

I don't have a percentage for you but agriculture-related futures make up a non-negligible amount of overall trading. It's not just some artificial example. Agricultural futures were also the first futures, and much of today's trading infrastructure was built around agricultural futures. So that's probably part of why it is such a common example.

They are far from the only example. Airlines use futures to hedge against fluctuations in fuel prices. Manufacturers use futures to hedge against fluctuations in the price of input materials. International businesses use FX swaps to hedge against currency fluctuations. Borrowers use interest rate swaps to hedge against interest rate rises. Investment funds (including pension funds and sovereign wealth funds) use options to hedge against drastic movements in asset prices.

I don't really understand your other questions. The use of derivatives in agriculture does not, on balance, result in fewer crops being produced. On the contrary, by allowing farmers to protect themselves against various risk, derivatives markets allow farmers to safely invest more money in production, and reduces the risk of farmers going bankrupt (bankrupt farmers don't produce many crops). Food would almost certainly be more scarce and more expensive if farmers did not have access to the financial markets.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#62

Post by mo_42 »

tech_ken wrote: post #17

This 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?

> 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?

If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital. So companies that bring value to society should be able to expand their business.

At the same time, regular people can invest in such companies at somewhat fair prices without doing much analysis. Basically, because the profits above the market average have been taken by smarter investors already. But it’s still good to always be able to put money somewhere and receive avg. market returns.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#63

Post by howard941 »

0xcafefood wrote: post #12
hartator wrote: post #11

Would love to be able to buy a printed copy.

On a related note: does anyone have good recommendations for printing services that can print and bind an online PDF, etc? I've looked into lulu.com and printme1.com but haven't used either for this purpose. I've wanted to do something similar for some of Beej's guides that are not in regular print, and would definitely consider for this too.

Most local printing places (places that do business cards, flyers, and the like) will gladly supply a quote for a single printed and bound PDF. Last time I did this only had to send the PDF for a complex flight sim. Shop local!

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#64

Post by pdntspa »

panarchy wrote: post #38
lolpython wrote: post #24

Earlier 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…

Well, pretty much everybody buying commodities at an institutional level are using futures contracts to smooth over price risk.

Oil, gas, lithium, corn....

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#65

Post by H8crilA »

mo_42 wrote: post #62
tech_ken wrote: post #17

This 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?

> 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? If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital. So companies that bring value to society should be able to expand their business. At the same time, regular pe…

Yeah, exactly. There is absolutely no way you could have ETFs if the "quick games" were forbidden. Not only because it's the HFTs that essentially run the fund on a day to day basis (see Authorized Participant for details).

One famous example with a completely extinguished price discovery is the Soviet Union. I think this is what killed it more than any internal or international political problems.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#66

Post by scubbo »

alphanullmeric wrote: post #53
tech_ken wrote: post #17

This 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?

Sounds like you worry too much about what other people do with their own time and money.

When it results in a concentration of wealth in the hands of people who can abuse it for political ends, or results in market crashes that cause knock-on impact to real humans - then yes, worrying about it is reasonable and justified.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#67

Post by jacobr1 »

dataflow wrote: post #59
lolpython wrote: post #24

Earlier 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-...

I get why farmers do it but what's the societal benefit of letting a rando like me buy and sell (i.e. make bets on) such contracts? Do farmers really prefer that random people do this?

They prefer a liquid market

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#68

Post by droffel »

marcosdumay wrote: post #55
panarchy wrote: post #38

Earlier 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…

The one goal of future contracts is for producers and consumers to be able to make deals before that production and consumption happens. Those are the primary dealers there, and I don't really remember where I got statistics, but AFAIK, they are about 10% of the volume. On top of those primary deals, a lot of people pile up making bets on secondary deals. Those are the people going for "hey, a lot more farms are grow…

> What about the crops they destroy because they would be less profitable?

To clarify this point specifically, food self sufficiency is considered a national security issue.

Consider the situation where a hostile country floods your market with cheap food products (below cost) until your country's farms go bankrupt due to an inability to compete. Once you stop producing food of your own, you give significant power to whoever controls your food supply.

This is a large part of why agricultural subsidies exist. And yes, sometimes it means paying farmers to let crops rot on the vine in order to not cause market gluts. That is an entirely different situation from futures and hedging, which in any sane market match supply and demand (with the result of minimizing waste).

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#69

Post by scubbo »

novosel wrote: post #18
tech_ken wrote: post #17

This 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?

Great questions, but no reply will be coming at you. Except an apologetic nonsense-logic-it-is-obvious-it-works trope. Only product is the profit.

Quite. The general response I get from questions like this to financial folks is that these markets and vehicles and products are important "for liquidity", but they can never quite tell me who liquidity benefits other than the system itself.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#70

Post by choeger »

dataflow wrote: post #59
lolpython wrote: post #24

Earlier 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-...

I get why farmers do it but what's the societal benefit of letting a rando like me buy and sell (i.e. make bets on) such contracts? Do farmers really prefer that random people do this?

It creates the market and should thus create the best possible price. Think of any speculation as a voting system with proof of stake.

Problems always appear when market participants try to affect reality to increase their odds, like shorting a position and then releasing some ugly news.

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