Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

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

jdawiseman.com

Post reply on HN
Print view View original

201–210 of 316 posts

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

#201

Post by chii »

xyzzyz wrote: post #142
asdff wrote: post #111

Earlier quoted context omitted.

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.

Because private insurers have incentive to accurately price risks. If they price them too low, they will go bankrupt. If they price them too high, the competition will steal their customers with lower rates for the same coverage. The governments, on the other hand, don’t go bankrupt, so when they price the risks too low, the public will be forced to bail it out anyway, either through taxes or through inflation. This…

This is exactly what moral hazzard is.

It's no different from the GFC, where the risk (of those mortgages) are mis-priced, and in the end, someone is left holding the bag.

A functioning market to redistribute risk needs transparent pricing, and proper bankruptcy (so in other words, the risk taker must not be bailed out, even if it hurts in the short term).

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

#202

Post by chii »

Matl wrote: post #117
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.

> The default should be the government doesn't do things Right, but taking this in the opposite direction then, why for public interest things should the default of 'people who just want to buy the next yacht' run them good?

because they can only buy that yacht _if_ they ran it good!

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

#203

Post by chii »

bombcar wrote: post #106
User23 wrote: post #93

Earlier quoted context omitted.

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.

> So I could decide that I think your house is likely to burn down, so I buy insurance on it.

which makes the insurance premium grow higher, reflecting the information that such a house has a high risk of burning down.

It doesn't matter that the buyer of the insurance has no material connection to the house. I can't see why such "gambling" shouldn't be allowed to happen, provided that there's enough regulation and monitoring so that you cannot then go and burn down someone's house to collect the insurance!

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

#204

Post by jdaw1 »

OJFord wrote: post #86
dataflow wrote: post #59

Earlier 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?

In general/basics/origins, farmers only want to sell futures, because they actually have (intend to have) the commodity for physical delivery, and do want to physically deliver it. So who is on the buy-side? Exclusively supermarkets/distributors, while exclusively farmers sell? I suppose that could work, but I assume it would quickly regress into tight relationships like we have (probably regionally variable) for sma…

Farmer agrees to sell an agricultural commodity to a grocer, for a price fixed now, with delivery after the harvest. Assume price falls a lot, and then the grocer goes bust. Ouch! Then the farmer must instead sell on the open market, at the lower price, and so becomes unable to make the payments on the mortgage on the tractor. Ouch ouch!

The farmer did want the price certainty that allows the risk of being more leveraged (tractor mortgage). But the farmer was not the optimal person to hold the credit risk of the grocer.

And the farmer might have sold without the intent to deliver. It might be that the delivery specification, or location, or whatever, isn’t perfect for the farmer. But if the farmer is confident that the prices will move together, then it still works.

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

#205

Post by hbarka »

chii wrote: post #197
hbarka wrote: post #176

Earlier quoted context omitted.

I would love to hear your opinion on Silicon Valley Bank and First Republic Bank. Did they deserve their fate on equal terms and also in retrospect who should have been the optimal holder of their risks?

> who should have been the optimal holder of their risks? they _produced_ more risk (by holding long maturity bonds that lose value as interest rate grows). This risk was not something that is inherent - they could've chosen not to do that with the large deposits from the pandemic money growth. There's noone who can be the optimal holder of the risk that is produced this way, because there's no value on the other end…

What about First Republic Bank?

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

#206

Post by aziaziazi »

logicchains wrote: post #195
DoingIsLearning wrote: post #194

Earlier quoted context omitted.

Isn't this the same discussion of infinite growth versus the ceiling of finite resources. It is logically not possible might take 20 years or 700 years but eventually a ceiling is reached.

Growth doesn't require more resources. If your barber finds a way to cut your hair 10% faster, that shows up in GDP growth. Increasing efficiency leads to increased GDP.

How about industrie, craftsmanship and farming? Can they “grow” over a certain period of time while the required resources doesn’t?

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

#207

Post by diordiderot »

alphanullmeric wrote: post #84
scubbo wrote: post #66

Earlier quoted context omitted.

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.

Feel free to not trade in this market then. “Mom they won’t share” is also not a particularly convincing way to justify the right to other people’s money.

Why is it their money? Your're starting at the wrong point in time friend.

You need mommy just as much.

E.g. Chad Ungabunga sees alphanumeric living on fertile soil with an attractive woman so he's going to bonk him over the head with a club and take his stuff because he's bigger and stronger.

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

#208

Post by RyEgswuCsn »

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…

I am not saying that the redistribution of risk is not useful —— it certainly is, and I agree with what you said. But let us suppose we would like to reverse climate change at a global scale in a short time without further damaging the environment, right now; I don’t see how it would be possible with our current technologies, even if every possible risk redistribution options are exhausted.

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

#209

Post by chii »

HWR_14 wrote: post #78
mo_42 wrote: post #62

Earlier quoted context omitted.

> 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…

> If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital. This only true of companies that were underpriced. Overpriced companies, either because of hype (Pets.com), fraud (Enron) or other reasons (maybe Jim Cramer issued a buy) do not benefit from a fairer price.

>> companies can raise more capital. > This only true of companies that were underpriced.

You mean over-priced?

because if a company is underpriced, they cannot raise capital as easily, since each share they raise would be underpriced, and thus the existing shareholders actually _lose_ value.

An overpriced company is one where raising capital (via equity offering) is worth doing. If a company was under-priced, it would actually make more sense to do buybacks instead.

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

#210

Post by chii »

plandis wrote: post #146
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?

The thing that I’ve always found wild is that the money people make on markets seems to be so much higher than the money people who actually make goods/services. Why has the global economy put such a high benefit from investment bankers compared to, for example, family doctors?

> family doctors

they can only scale at most linearly, with the number of hours they work.

A financier can scale multiplicatively, because the amount of the monies they deal with can increase without "extra work". The multiplicative nature means the more capital you have access to, the more money you get to make, which approaches exponential at some point.

And in the end, the financier speculating on the markets can affect many more people than the doctor ever can in their life.

Post reply on HN