Pricing Money: A beginner's guide to money, bonds, futures and swaps • Hacker News Board

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

#241

Post by pavlov » Sat, Jun 17, 2023, 12:56 PM UTC

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?

Sibling comments have provided good explanations of why modern economies need finance: risk management, capital allocation, enabling ventures, and so forth.

At the same time, it’s worth asking the question of why the financial sector just keeps growing and whether that’s desirable. Shouldn’t improved efficiency with digital systems make this intermediation layer thinner, less labor-intensive, more competitive? Instead it seems to be capturing an ever larger share of the economy’s output to itself.

In my opinion regulators should try deploying some blunt tools like transaction taxes and hard salary caps, and see if we’d be any worse off with a smaller and poorer financial sector.

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

#242

Post by norswap » Sat, Jun 17, 2023, 12:58 PM UTC

less_less wrote: post #220

pembrook wrote: post #186

Earlier quoted context omitted.

By referring to arbitrage as “games” OP’s comment has poisoned the well for this entire chain of responses. So to get an understanding, first we need to fix. A “game” implies non-productive or zero sum. By definition, an arbitrage is not that. Any arbitrage is the result of an inefficiency in prices or the economy. When someone arbitrages prices back to where they should be, they are performing a service that everyon…

> When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage give…

I understood it as it's an arbitrage because it enables the creation of a new system that reward arbitrageurs less (but still enough that they would perform the arbitrage).

Though this is only true in a system where you don't face tons of hurdles to deploy these new systems, which is not the case in the current financial system.

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

#243

Post by tomatocracy » Sat, Jun 17, 2023, 1:02 PM UTC

dataflow wrote: post #102

skybrian wrote: post #99

Earlier quoted context omitted.

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?

To answer your question directly, there are active markets where insurance policies are effectively "traded" like this (reinsurance and retrocession and the Lloyds market). A single policy with sufficient limits absolutely does get syndicated out and bought like this. For smaller policies they get bundled up. But they're professional markets where participants must be regulated because insurance regulation is how we mitigate counterparty credit risk on insurance policies.

But "like insurance" I think was meant as a broader term. Traditional insurance contracts look a bit like options. But forward purchases or sales are also often used as "insurance". The big gain is that purely cash settled contracts (or contracts where cash settlement is possible as a result of sufficient market liquidity existing to allow closing a position before physical settlement) can be used for risk mitigation in other ways which offer much better liquidity and better cost-efficiency in the right markets.

A good real world example is oil price hedging. An airline might want to mitigate the risk that their future cost of jet A-1 goes up. On the other hand, an oil producer might want to mitigate the risk that their future sale price of a particular blend of their crude goes down. Instead of using insurance or entering into bilateral forward contracts, both can trade futures or options on a standardised crude (which neither of them is ever planning to physically deliver or take delivery of[0]). The contract they are trading will not be a perfect hedge for either of them, but it will mitigate their risk significantly. In fact if they are both large enough, bilaterally the liquidity available to them would likely be insufficient to mitigate the same amount of risk.

Having a "single", transparent price also brings some other benefits beyond simple liquidity. For example, it enables several ways to manage counterparty credit risk which would otherwise be unavailable (daily margining, use of central counterparties or clearing, etc).

[0] although the contract might enable an oil producer to make physical delivery of their own blend with a price adjustment

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

#244

Post by less_less » Sat, Jun 17, 2023, 1:07 PM UTC

nsvd wrote: post #227

less_less wrote: post #220

Earlier quoted context omitted.

> When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage give…

I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop. Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs…

> I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop.

I don't think this follows for all financial services. Overproduction leads to a drop in value if the market is efficient, but real-life markets are not perfectly efficient. For arbitrage in particular, the whole point is that the market isn't efficient. Arbitrage makes it more efficient after the arbitrageurs have taken their cut, but the value of that service isn't necessarily determined efficiently. (At least as far as I know: I'm not an expert.)

> Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs.

> In other words, if the financial sector was largely a collection of small businesses run by middle class people, no one would think it was a problem that they make money. That would be great! But in reality it's a smaller amount of companies and smaller amount of wealthy people that benefit from it.

> That problem isn't unique to finance, it affects many parts of our society.

... but I do almost entirely agree with this.

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

#245

Post by chii » Sat, Jun 17, 2023, 1:34 PM UTC

flagrant_taco wrote: post #229

chii wrote: post #211

Earlier quoted context omitted.

I know less about FRB's failure. It was likely due to a domino effect from SVB's - specifically, FRB has a high uninsured ratio of deposits (they service rich people). The FDIC has announced that they will not do a repeat of what they did for SVB - insure the full deposit amount rather than just the $250k. Therefore, anyone with a large deposit in a small bank is going to want to move their money out into a "too big…

> They should've just lied, and said that they'd do it for another bank, if there's a need to; this would've stopped any fear of a run, and thus stop the run before any more dominos collapse. While this may have prevented FRB, that's a very dangerous game to play should the bluff get called. I'm strongly opposed to the idea that those given the power and authority to control or markets, as best they can, should world…

The thing is, this white lie is what keeps confidence levels high, which is what prevents the run.

By merely suggesting that a bank can fail, and that the FDIC is not going to bail out high depositors, they paradoxically _cause_ the run. After all, the people who took the money out just merely redeposited it back elsewhere (that they trusted more).

The white lie is better than a loss of trust which lead to an actual problem. And the FDIC could actually lie without lying by putting in vague words and misdirect people - such as saying things like "if necessary". In fact, people in society today believe plenty of white lies already - what's one more?

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

#246

Post by polymathemagics » Sat, Jun 17, 2023, 1:48 PM UTC

alecco wrote: post #218

All these Financial guides are very interesting. But beware of falling into the illusion of being a good-enough active investor. It's like entering the Pro league as an overconfident amateur. The other players are the best in the universe. And they have cybernetic extensions: algorithmic trading with virtually limitless amounts of resources and information. And sometimes they have "alpha" you'll never, ever get your…

Agree that people should not do active investing, although the solution would be passive investing (index funds), which allow you to focus on friends & family without missing out of the economy's long term gains.

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

#247

Post by consultSKI » Sat, Jun 17, 2023, 1:54 PM UTC

Interesting insights... it is going to take me a couple of reads to comprehend all the value here. Thx JDAW

P.S. Thx for the PDF version

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

#248

Post by alphanullmeric » Sat, Jun 17, 2023, 1:58 PM UTC

diordiderot wrote: post #207

alphanullmeric wrote: post #84

Earlier quoted context omitted.

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.

It’s their money if you follow the “force is only justified in response to force” principle. They didn’t obtain their money by force, so you can’t take it by force from them.

I believe that principle should be enforced by the government, that’s the only thing I need mommy for. Given that you also believe in police, military and courts, on top of a bunch of other shit (like stopping consenting individuals from trading their own money), no I don’t need mommy “just as much”.

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

#249

Post by wavemode » Sat, Jun 17, 2023, 2:05 PM UTC

less_less wrote: post #220

pembrook wrote: post #186

Earlier quoted context omitted.

By referring to arbitrage as “games” OP’s comment has poisoned the well for this entire chain of responses. So to get an understanding, first we need to fix. A “game” implies non-productive or zero sum. By definition, an arbitrage is not that. Any arbitrage is the result of an inefficiency in prices or the economy. When someone arbitrages prices back to where they should be, they are performing a service that everyon…

> When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage give…

It's much simpler than that. The utility provided by arbitrage is that a given security is no longer under- or over-priced in one market relative to other markets. Any buyer/seller of that security will then always be buying/selling for the best available price (rather than losing out on money by not buying/selling in a different market).

The price discrepancy which was corrected by arbitrage is, itself, the compensation the arbitrageur receives. If it weren't, that inherently also means that there still exists a price discrepancy, and thus an arbitrage opportunity.

This is all separate from the question of public policy. Should taxes on income from arbitrage be increased? Perhaps they should. Though that doesn't affect the mechanics of how arbitrage works, it simply decreases the net profit of the firm doing the arbitrage.

Conceivably, you could increase the taxes/regulations/restrictions on such firms to such a degree that they are either no longer allowed to perform arbitrage at all and/or can no longer justify the cost of the high-speed equipment involved. The end result of this would be that the markets become less efficient (there would be greater price discrepancies and they would arise more frequently).

How much does that matter? Well, that's more of a philosophical question. How much does it matter to you that you're buying something for the best possible price (versus knowing it might be available cheaper elsewhere)? Depends on the person.

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

#250

Post by pcdoodle » Sat, Jun 17, 2023, 2:06 PM UTC

norswap wrote: post #239

FabHK wrote: post #151

Earlier quoted context omitted.

> The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. That is just one of the purposes; others are: - time-shifting of consumption: borrow when you study or build a house, then invest and save during work years, then live of retirement portfolio - maturity transformation enabling investment: extra cash goes in the bank (and can be redeemed…

I was nodding my head along (fantastic answer) until the stab at crypto. Let me offer a (partial) defense of crypto if I can: Broadly, crypto is divided into crypto-currencies and applications. Let's tackled currencies first, some of which some are reputable and some of which are grifts, but which viewed in their most favorable light attempt to be a form of currency or asset that is decentralized. This means that no…

Another useful aspect:

Heat pumps will take a long time to reach every application that needs heating. EG: drying grain. Sometime heat pumps are not the answer (-21F for instance). Bitcoins resistive heating properties are almost 100% efficient.

With bitcoin mining: Money In = Heat + Air Flow = Money Out.

Electrical energy now has an opportunity to not be waisted where it normally would be. Think renewables where line loss / demand doesn't make a perfect system. Bitcoin can act as a storage device with near free movement allowing flexibility in these systems.

This monetary recovery can also be used to move money/energy to other places without the line loss.