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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

#171

Post by ezconnect »

rfrey wrote: post #134
nullindividual wrote: post #131

Earlier quoted context omitted.

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.

He's saying you are required by law to buy insurance for your house because of government regulation. There's no way of saying no.

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

#172

Post by astrange »

gabereiser wrote: post #76
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…

>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.

Although none of them are for onions, because we were so annoyed at two guys cornering the market we banned that and then forgot to ever undo it.

https://en.wikipedia.org/wiki/Onion_Futures_Act

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

#173

Post by rocho »

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?

Futures and options were born from commercial needs.

Suppose you produce oranges. It'll take a few months for the harvest, and while costs are generally well understood and stable, at what price will you sell those oranges? What if by then the price of oranges tanks and you find out you're not turning a profit? This is where futures come in. The producer can sell a number of futures contract to lock in a future selling price, making cash flows much clearer and predictable.

Conversely, there's the case of a factory that needs to buy oranges for its products. They have the opposite problem and would like to make costs more predictable. Then they'd buy futures to lock in a future buying price.

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

#174

Post by vineyardmike »

photonbucket wrote: post #161
FabHK wrote: post #153

Earlier quoted context omitted.

Sure, but without insurance, everyone would have to have enough cash available to build a second home in case the first burns down (ie, provision for the worst case loss). With insurance, just need to have extra cash corresponding to the expected loss (ie, worst case loss times probability it happens) plus some cost for administering the insurance. So, effectively [1], with insurance everyone can build a house nearly…

People would just live with the risk, if their house burns down they're just homeless

How terribly unproductive

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

#175

Post by lend000 »

consilient wrote: post #166
lend000 wrote: post #89

Earlier quoted context omitted.

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…

> lack of information/technology or centrally planned prices, some of which resulted in failed states (e.g. Venezuela and the Soviet Union) Venezuela has never had Soviet-style central planning. It's a market economy with a public sector only slightly larger than the OECD average. Their current situation is largely the result of excess social spending: first at the expense of investment and diversification away from…

While you're correct that high social spending that relied on high oil revenue was probably the primary cause of Venezuela's economic collapse, they had price controls on food starting back in 2003 and they began nationalizing major industries in addition to oil by 2008. From 2008, it was a full on centrally planned disaster.

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

#176

Post by hbarka »

jdaw1 wrote: post #85
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?

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 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?

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

#177

Post by solumunus »

dataflow wrote: post #82
HWR_14 wrote: post #74

Earlier 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?

But what's the negative to society? You seem really bothered about this and it's not clear why.

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

#178

Post by solumunus »

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?

> I don't follow. If the goal is insurance then why not just have... something more like insurance?

Because this is more efficient and useful.

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

#179

Post by beefield »

boppo1 wrote: post #170
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…

The book is from 2001; are there any substantial changes in the landscape a motivated finance student should be aware of?

As a beginner book, no there are no substantial changes on what a beginner should read.

However, while the simple discounting formulas described (likely, haven't read other than the list of contents) in the book were at the time actually used more or less as-is to value instruments in the derivative markets, nowadays they are seldomly used on their own. Two major developments there are multi curve discounting taking collateralization into account and different valuation adjustments, collectively known as XVAs.

That is not to say you do not need to understand the beginner basics, vice versa, iys just that nowadays there is much more nuance in actual valuation.

Edit: to add, I'm not sure if its useful to study these nuances in detail, unless you are going to actually work on the markets. In the big picture their details are likely not worth it, but of course it is good to try to understand why these developments have been needed/wanted by market participants.

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