3 ms·
The relationship between futures traders and farmers is pretty much identical to that between any kind of insurance company and its customers - it's a risk arbi
by wdg3 3y ago
The relationship between futures traders and farmers is pretty much identical to that between any kind of insurance company and its customers - it's a risk arbitrage transaction where the client (farmers in this case) are sacrificing profit in expectation for a flatter outcome curve which in a properly priced market yields higher utility in expectation, since utility as a function of profit is concave for an individual farmer and much closer to linear for a well-capitalized market maker.
- abdullahkhalids 3y agoI understand the mathematics. The problem is that there is a practical asymmetry of information. Large future traders can invest a lot of resources into getting a much better prediction of future prices, while individual farmers cannot. In such scenarios, it is inevitable that farmers will be exploited by future traders into making bad deals.
- malloryerik 3y agoYou might try examining -- with an open mindset -- a few CFTC Commitments of Traders reports and then see if you feel the same way.