Earlier quoted context omitted.
Risk management is the product. Surely you agree that a product that reduces risk is worth something, right?
Sure I’m pro-risk management. So by arbing lending-rates which risks are mitigated?
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Pricing Money: A beginner's guide to money, bonds, futures and swaps
101–110 of 316 posts
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#102Earlier quoted context omitted.
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's doubtful that farmers care about you in particular. However, in general, the societal benefit should be like a loan, like insurance, or both, depending on what it is. Loans are useful and necessary because businesses need to buy things before they get paid. It can't all be done using Kickstarter! Farming works this way. Insurance is useful because you get paid when something bad happens to you. On a day when you…
I don't follow. If the goal is insurance then why not just have... something more like insurance? Like when you buy insurance for your car or home? We don't let randos buy options on the average Joe's mortgage or car loan and claim it helps price discovery or liquidity, right? Or is it the case that even I can do that and I'm just out of the loop?
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#103Earlier 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?
Provide liquidity. Speculators are trying to make profit, but their existence is important to make sure the farmers are correctly priced.
Do farmers prefer that? Yes, the larger the futures market, the price of selling futures will be closer to optimal. If the market is illiquid, farmers often have to sell futures at a lower prices to market makers.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#104Earlier 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…
>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? Because it was created by them, for that very purpose? Futures Contracts. Chicago Mercantile Exchange. Up until 1971 future contracts were ONLY for agricultural goods.
Metal futures have been traded on the London Metal Exchange since 1877, and before that at other venues on Threadneedle St.
The Dutch (and after the idea had crossed the Channel, the English) were trading debt from the invention of exchanges.
The CME might have started with FX futures in 1971, but they're hardly the first non-agricultural use.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#105Earlier 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…
Because farmers have been using futures contracts (traded on an exchange) since 1859. And technically, futures are a more standardized tool than forwards are, hence the talk about futures all the time. [1] For reference, forwards have been used forever, and used for all sorts of commerce. [2] We take for granted that you can pull out an iPhone and buy your favorite stock in seconds, but for most of history, nobody co…
Or since the 18th Century in Japan (and I'm sure other places before 1859).
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#106Earlier quoted context omitted.
I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…
It is an interesting reframe to think of insurance as a, roughly, ATM put. Having some experience with both trading derivatives and gambling though, I’m fairly confident saying that it’s a distinction without a difference. In both cases a little guy with an understanding of risk and bankroll management and some aptitude for the game, which for trading is a Keynesian beauty pageant, can scrape up a few bucks. But most…
The derivatives market is like if they let you buy insurance on anyone without ah insurable risk.
So I could decide that I think your house is likely to burn down, so I buy insurance on it.
That's what enables the gambling. If the only people who could buy puts or calls were people who had insurable risks in the underlying; it would be a lot smaller market and less gambling.
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#107Earlier quoted context omitted.
Theoretically, the societal benefit of lettings randos buy and sell contracts is that there is (a) better price discovery and (b) better liquidity. There are probably theoretical counterarguments to both of those points, but it's hard to see alternative systems that provide either or both those features. At a basic level, obviously thee needs to be someone assuming the price risk from the farmers, and those people wi…
I buy that there's some benefit, but I don't buy that it's significant. And I don't see any reason why I should believe this provides a net benefit to society. Sure it saves the original parties some money, but then a bunch of unrelated parties come in and siphoning money from the existing parties. Why should I believe this is net-benefiting society?
If it "saves the original parties some money" than how is it "unrelated parties... siphoning money from the existing parties"?
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#108This is really interesting. Very early in my career I worked on a team that supported the interest rate swaps desk at a large investment bank. Not one person told me to read this book. I still don't know what they are. Wish I read this back then!
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#109This 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 output (generally speaking, not specific to money markets) is better prices. There are large scale examples of economies in which prices were mismanaged either due to lack of information/technology or centrally planned prices, some of which resulted in failed states (e.g. Venezuela and the Soviet Union). While providing market information signals via prices is certainly an abstract concept that most people will n…
CDOs aren't particularly crazy until you start pricing them using completely fictitious numbers and reasoning (IMO at least).
Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps
#110This 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?
Prices and financial markets in general exist solely for information transmission. The central problem of economics is "How do you produce the things that your population needs, in the quantity and at the time they need them, as efficiently as possible?" This is why every centrally-planned economy eventually fails, and why we were stuck in the feudal middle ages for a millennia. Information (and incentives ) about wh…
> solely for information transmission
Certainly one function of financial markets and prices is to convey information, but that's not "solely" their purpose. They also provide a mechanism for resource allocation, risk management, wealth generation and collective action, among other things.
Your point about centrally planned economies, while historically corroborated in cases like the Soviet Union, might be an overgeneralization. The effectiveness of an economic system depends on numerous factors, including its degree of flexibility, the effectiveness of its institutions, and its ability to adapt to changing circumstances.
Not all centrally planned economies are doomed to failure; some have been quite successful, notably in East Asia where countries like China and Vietnam have managed a mixed economy with elements of central planning and market mechanisms.
Many capitalist corporations are centrally planned economies larger than many nation states. While everything fails eventually, these centrally planned organizations can last multiple human generations, and can be more durable than many markets and market-oriented economies.
The assertion about the feudal Middle Ages also needs some nuance. The Middle Ages, and the feudal system in particular, had complexities beyond simple information and incentive problems. Numerous sociopolitical factors were at play, including a rigid class structure, the influence of the Church, and the lack of certain technological innovations. Ascribing the issues of a historical period mainly to its economic structure oversimplifies the multitude of factors that influenced societal development.
Moreover, while financial markets do help in transmitting information from consumers to producers, they are not infallible. They can, and often do, suffer from issues like information asymmetry, where one party in a transaction has more or better information than the other. This can lead to problems like adverse selection and moral hazard. Financial markets can also be subject to speculation, which can distort the "signal" provided by prices.
The focus on profit as the sole incentive in the market might be somewhat limited. People's decisions to buy, sell, and produce are influenced by a host of factors beyond profit, including societal and environmental concerns, personal values, and ethical considerations. Financial systems, to be truly effective, need to take into account this wide range of motivations.