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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

#131

Post by nullindividual »

nostrademons wrote: post #88
jdaw1 wrote: post #85

Earlier 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…

Note also that in some cases you might be the optimal person to hold the risk that your house burns down, if, for example, your liquid net worth is 100x the replacement cost of your home. And that's illustrative of the value of markets: you can choose to transact in them, depending on your personal circumstances. The insurance market exists because for the vast majority of people, rebuilding their home is not feasibl…

It’s not a choice to be part of the insurance market for the vast majority of American homeowners. What you describe is choice in name only.

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

#132

Post by chishaku »

jeron wrote: post #116
jdaw1 wrote: post #85

Earlier 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…

I like how this guy has written two books on completely different subjects - Money and Wine

Money and wine are closely related.

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

#133

Post by toast0 »

totallywrong wrote: post #126
anon291 wrote: post #113

Earlier quoted context omitted.

I think the question should be 'why not'? The default should be the government doesn't do things and only does things that it is uniquely able to do.

Yeah, capitalism 101, good in theory but terrible for most people in practice. Look at e.g. the health system, where a major issue means total bankruptcy and life debt. A somewhat balanced system where governments protect basic needs and have some control over the markets is the ideal imo.

> total bankruptcy and life debt

Those are two different things. Bankruptcy isn't fun, but it clears your debt.

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

#134

Post by rfrey »

nullindividual wrote: post #131
nostrademons wrote: post #88

Earlier quoted context omitted.

Note also that in some cases you might be the optimal person to hold the risk that your house burns down, if, for example, your liquid net worth is 100x the replacement cost of your home. And that's illustrative of the value of markets: you can choose to transact in them, depending on your personal circumstances. The insurance market exists because for the vast majority of people, rebuilding their home is not feasibl…

It’s not a choice to be part of the insurance market for the vast majority of American homeowners. What you describe is choice in name only.

Your parent literally said

  if, for example, your liquid net worth is 100x the replacement cost of your
  home.
and

  for the vast majority of people, rebuilding their home is not feasible with 
  their current net worth.

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

#135

Post by rfrey »

RyEgswuCsn wrote: post #122
jdaw1 wrote: post #85

Earlier 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…

Except that is not exactly "productive", isn't it? After all, risk was not eliminated, only redistributed. Productive output, e.g., would be something that reduces the chance of your house catching fire.

Many businesses would behave much more conservatively -- making much smaller bets, conserving cash instead of investing it -- if they could not offload certain risks. So that ability does increase overall productivity IMO.

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

#136

Post by conradev »

asdff wrote: post #111
jdaw1 wrote: post #85

Earlier 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…

Why have them privately controlled at all? The fed prints the money. The fed could be the bank and insurer as well, and obviate the middle men skimming the pot.

It’s a valid question!

There are people advocating for “public banking”: https://publicbankinginstitute.org/

and credit unions also exist, which are nonprofits

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

#137

Post by burntwater »

RyEgswuCsn wrote: post #122
jdaw1 wrote: post #85

Earlier 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…

Except that is not exactly "productive", isn't it? After all, risk was not eliminated, only redistributed. Productive output, e.g., would be something that reduces the chance of your house catching fire.

Risk, for many things, will never be eliminated. They can only be reduced and/or redistributed.

For example, having fire sprinklers greatly reduces the risks from fire. However even the reduced risks are still too great for your typical homeowner, so therefore those risks are distributed (and the reduced risks are reflected in lower premiums for the homeowner).

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

#138

Post by fsckboy »

nimithryn wrote: post #128
RyEgswuCsn wrote: post #122

Earlier quoted context omitted.

Except that is not exactly "productive", isn't it? After all, risk was not eliminated, only redistributed. Productive output, e.g., would be something that reduces the chance of your house catching fire.

The redistribution is productive, because by redistributing risk (not just among people, but also across time), some ventures that were otherwise not feasible become feasible. For example, you want to build a house - but you don’t have the cash. A bank gives you a loan. They take the risk that you won’t pay them back, you get a house, and return they get a premium. This benefits many stakeholders (you, the bank, the…

> If the bank has too much risk, they can off board it to someone with deeper pockets and a more diversified portfolio

... or especially to somebody who happens to bear the reverse risk.

For example, a wheat farmer doesn't want the risk that wheat prices might collapse by harvest time due to windfall harvests somewhere else in the world; and the spaghetti maker doesn't want the risk that wheat prices might be soaring due to crop failures somewhere else-else. They make a deal now so they don't need to worry about the future, but they don't need to make the deal directly, they can each buy or sell wheat futures.

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

#139

Post by pravus »

Utkarsh_Mood wrote: post #50
pwatsonwailes wrote: post #39

Earlier quoted context omitted.

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 h…

> Are there no repercussions if the contract isnt honored?

Basically the entire point of futures markets is to standardize the contracts and process by which these contracts are fulfilled to the point where all of that is just part of the pricing mechanism.

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

#140

Post by fsckboy »

User23 wrote: post #93
jdaw1 wrote: post #85

Earlier 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…

casinos are based on pure chance which nobody cares about (what does it matter to the outside world if a coin came up head or tails?) and the house still takes a cut.

financial markets are based on stochastic events which do matter very much, such that paying a broker is worth it. If it's not worth it to somebody, they should not participate, but in that sense they shouldn't participate in casinos either.

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