The Economic Function of Futures Markets (Continued) The existence of the futures market for wheat conveys information to all producers,distributors,and consumers;and this eliminates the necessity for market participants to gather and process information in order to forecast the future spot price .THE COURSE OF FINANCE 2017 SPRING SJTU 1
The Economic Function of Futures Markets (Continued) The existence of the futures market for wheat conveys information to all producers, distributors, and consumers; and this eliminates the necessity for market participants to gather and process information in order to forecast the future spot price
14.3 The Role of Speculators Hedger anyone using a futures market to reduce risk Speculator anyone who takes a position in the market(increasing his risk)in order to profit from his forecasts of future spot prices (A producer,distributor or consumer who chooses not to hedge her risk may be considered to be a speculator) .THE COURSE OF FINANCE 2017 SPRING SJTU 12
14.3 The Role of Speculators Hedger anyone using a futures market to reduce risk Speculator anyone who takes a position in the market (increasing his risk) in order to profit from his forecasts of future spot prices (A producer, distributor or consumer who chooses not to hedge her risk may be considered to be a speculator)
The Role of Speculators: Example Suppose that the current 1-month futures in wheat is $1.5/bushel,and a farming family with stored wheat believes that the price will rise to $2.00 Not hedging the stored wheat results in the family being exposed to the vagrancies of the wheat market,and it becomes,in effect,a wheat speculator (just like their cobbler cousins who are long wheat futures .THE COURSE OF FINANCE 2017 SPRING SJTU 13
The Role of Speculators: Example Suppose that the current 1-month futures in wheat is $1.5/bushel, and a farming family with stored wheat believes that the price will rise to $2.00 Not hedging the stored wheat results in the family being exposed to the vagrancies of the wheat market, and it becomes, in effect, a wheat speculator (just like their cobbler cousins who are long wheat futures)
The Role of Speculators: Gamblers and Wasters Critic:“Speculators have no social value” Answer: Successful speculators make the market more efficient as an information resource provide liquidity when it is needed,which is when producers,distributors,and consumers can't or won't hedge more efficient by contributing towards recovering the fixed costs of providing a futures exchange .THE COURSE OF FINANCE 2017 SPRING SJTU 14
The Role of Speculators: Gamblers and Wasters Critic: “Speculators have no social value” Answer: Successful speculators make the market more efficient as an information resource provide liquidity when it is needed, which is when producers, distributors, and consumers can’t or won’t hedge more efficient by contributing towards recovering the fixed costs of providing a futures exchange
14.4 Relationship Between Commodity Spot and Futures Prices Arbitrageurs place an upper bound on futures prices by locking in a sure profit on futures prices if the spread between the futures price and spot price becomes greater than the cost of carry,F-S<C the cost of carry varies as a function of time and warehousing organization .THE COURSE OF FINANCE 2017 SPRING SJTU 15
14.4 Relationship Between Commodity Spot and Futures Prices Arbitrageurs place an upper bound on futures prices by locking in a sure profit on futures prices if the spread between the futures price and spot price becomes greater than the cost of carry, F - S £ C the cost of carry varies as a function of time and warehousing organization