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This comment shows what is wrong with people's understanding of futures markets. Commodity futures are not for the supply of commodities. If you need a supply o

by kqr 2y ago

This comment shows what is wrong with people's understanding of futures markets. Commodity futures are not for the supply of commodities. If you need a supply of commodities, cash contracts are your thing. Futures, specifically, are useful for implicitly borrowing commodities to control inventory levels across time. An airline needs continuous access to jet fuel, so to be safe, they buy more jet fuel than they need in the cash market. But they don't want to pay for owning all this jet fuel, so they simultaneously sell it off in the futures market. Thus, they have created a loan of jet fuel, making sure they have spare fuel available when they need it without outright having to own it. In order to have a loan, one needs a speculator willing to buy the credit risk. More speculators usually leads to more liquidity and more accurate deals on loans. There's nothing wrong with this at all. See The Economic Function of Futures Markets by Williams (1986) if you are curious.

keepamovin 2y ago
It would be good if you could do this with cloud capacity.
- kqr 2y ago
  Doesn't make sense for e.g. compute because compute resources are infinitely perishable. Maybe could work for storage.
  - keepamovin 2y ago
    I guess I was thinking more like: you pay for a contract for bundle of resources now, to insure you against capacity overruns, and to sell it back at a future date. You can probably arbitrage the difference due to on-demand/reserved-capacity pricing ratio. But also i don't really understand what you mean by infinitely perishable? Can you explain more?
    - kqr 2y ago
      What I mean is that 5 bushels of wheat purchased now and stored properly can be used just the same now as three months from now. On the other hand, at a fundamental level, 5 minutes of compute purchased now are gone forever if not used. When a clould provider pretends to sell you five minutes of compute they are not really selling you five minutes of compute, but promising to split off five minutes of partial compute from other tenants to make room for you. It gets a little complicated...
- formercoder 2y ago
  Pretty much the Reserved Instance Marketplace
  - keepamovin 2y ago
    Did not know about that! Can you recommend an approach, any cautionary tales? Do clouds beyond AWS have similar?
watwut 2y ago
There is no loan necessary in the plane example. Future is an agreement that you will buy/sell a thing for set price in a set date. No one needs to borrow anything for it to work. To manage the repository, the plane company will have contract to by x barrels at 1 of March for some price. That is it, that is what future is - contractual obligation to with a set date. Also, while origin stories are nice, most future trades are pure speculations on price. There is no reason to pretend these original stories are how securities are actually used. Your story may make a bit more sense with options where one party can choose to exercises their right to sell or buy. Then you can use it to manage actual amounts of commodity. But futures do not carry any such option with it. It is strict agreement with no choices. The plane company can use futures to guarantee certain fuel price in the future, so that some short term market swing wont make fuel too expensive for them.
- kqr 2y ago
  > There is no loan necessary ... That is also not what Williams says. He says a simultaneous long cash--short future position is practically the same as a loan of the corresponding commodity. (With the lending side being short cash--long future.) This activity accounts for many of the patterns we see in futures markets.
  - watwut 2y ago
    That position has zero to do with managing fuel inventory. He was trying to argue this is supposed to help managing inventory in practical world. These patterns are about speculation, not about managing inventories.
- seanhunter 2y ago
  A futures trade always involves variation margin, and if you read a margin agreement you’ll see it is a credit agreement. That’s so people don’t just run away from trades which are underwater and screw the other side over.
  - watwut 2y ago
    That is something you have to do when you do speculative trades. That has zero to do with managing inventory. You are not required to take loan to buy futures. You can do so, because then you can bet more then you have. But you dont have to.
potato3732842 2y ago
Man, it's hilarious how you managed to go full circle around the point while missing it. If the airline wants to ensure future supply at a given prices they can simply buy futures settled in actual product. Hedging against future volatility by agreeing on a deal "now" is the entire point. Sure, sometimes you lose when there's a price drop but the other guy won. At the end of the day everyone benefits from smoothing out the volatility. Buying and selling cash settled futures is just how small time buyers and sellers access the market since they can't take delivery of entire train loads of goods but still need to hedge. Finance professionals trading them around to wring out an extra percent here and there it beside the point.
- kqr 2y ago
  No, this is a common misconception. If hedging was the point, futures markets would show more evidence of risk aversion than they do. Again, I recommend that Williams' book if you're curious!
  - Marazan 2y ago
    That's only because the markets have been opened up to non-producer/consumer participants.
- seanhunter 2y ago
  Hedging can’t be the only point, which is something we have known since the ancient Babylonians invented futures. For every person who is trying to hedge future volatility, there has to be a person on the other side of that contract who is speculating on the possibility that the hedge guy is more frightened that they should be. You need hedgers and speculators to have a two-way market, and in markets where you have predominantly hedgers they get completely fleeced by the few speculators brave/dumb enough to take the other side of their trades. This is because many markets are structurally unbalanced such that the people who need to hedge long (producers) and people who need to hedge short (consumers) operate on different timeframes etc. So if I’m a farmer growing some crop I might want to sell the 1yr future, but the guy trying to hedge the price for purchase (wholesale grocer or whatever) will be hedging the front future like 1m out. So someone has to carry the risk in the forward curve between 1m and 1 year or noone gets the hedge they need and the market doesn’t work. Quite aside from that, there are all sorts of things which are cash-settled because you literally can’t do a physical settlement but people need to hedge (yes and speculate) anyway. Take an index future on an equity index. How are you going to physically settle a future on the SPX or (god forbid) the Russell? The liquidity consequences would be devastating to markets.
colechristensen 2y ago
>Commodity futures are not for the supply of commodities. This is a silly statement. Commodity producers absolutely do use futures markets to sell their product. >More speculators usually leads to more liquidity and more accurate deals on loans. More speculators also leads to more speculation which can lead to anywhere up to a complete disconnect of the price from anything to do with supply or demand. Case in point: onion futures are illegal in the US https://en.wikipedia.org/wiki/Onion_Futures_Act https://en.wikipedia.org/wiki/Onion_Futures_Act

by kqr 2y ago

keepamovin 2y ago

It would be good if you could do this with cloud capacity.

kqr 2y ago
Doesn't make sense for e.g. compute because compute resources are infinitely perishable. Maybe could work for storage.
- keepamovin 2y ago
  I guess I was thinking more like: you pay for a contract for bundle of resources now, to insure you against capacity overruns, and to sell it back at a future date. You can probably arbitrage the difference due to on-demand/reserved-capacity pricing ratio. But also i don't really understand what you mean by infinitely perishable? Can you explain more?
  - kqr 2y ago
    What I mean is that 5 bushels of wheat purchased now and stored properly can be used just the same now as three months from now. On the other hand, at a fundamental level, 5 minutes of compute purchased now are gone forever if not used. When a clould provider pretends to sell you five minutes of compute they are not really selling you five minutes of compute, but promising to split off five minutes of partial compute from other tenants to make room for you. It gets a little complicated...
formercoder 2y ago
Pretty much the Reserved Instance Marketplace
- keepamovin 2y ago
  Did not know about that! Can you recommend an approach, any cautionary tales? Do clouds beyond AWS have similar?

watwut 2y ago

There is no loan necessary in the plane example. Future is an agreement that you will buy/sell a thing for set price in a set date. No one needs to borrow anything for it to work. To manage the repository, the plane company will have contract to by x barrels at 1 of March for some price. That is it, that is what future is - contractual obligation to with a set date. Also, while origin stories are nice, most future trades are pure speculations on price. There is no reason to pretend these original stories are how securities are actually used. Your story may make a bit more sense with options where one party can choose to exercises their right to sell or buy. Then you can use it to manage actual amounts of commodity. But futures do not carry any such option with it. It is strict agreement with no choices. The plane company can use futures to guarantee certain fuel price in the future, so that some short term market swing wont make fuel too expensive for them.

kqr 2y ago
> There is no loan necessary ... That is also not what Williams says. He says a simultaneous long cash--short future position is practically the same as a loan of the corresponding commodity. (With the lending side being short cash--long future.) This activity accounts for many of the patterns we see in futures markets.
- watwut 2y ago
  That position has zero to do with managing fuel inventory. He was trying to argue this is supposed to help managing inventory in practical world. These patterns are about speculation, not about managing inventories.
seanhunter 2y ago
A futures trade always involves variation margin, and if you read a margin agreement you’ll see it is a credit agreement. That’s so people don’t just run away from trades which are underwater and screw the other side over.
- watwut 2y ago
  That is something you have to do when you do speculative trades. That has zero to do with managing inventory. You are not required to take loan to buy futures. You can do so, because then you can bet more then you have. But you dont have to.

potato3732842 2y ago

Man, it's hilarious how you managed to go full circle around the point while missing it. If the airline wants to ensure future supply at a given prices they can simply buy futures settled in actual product. Hedging against future volatility by agreeing on a deal "now" is the entire point. Sure, sometimes you lose when there's a price drop but the other guy won. At the end of the day everyone benefits from smoothing out the volatility. Buying and selling cash settled futures is just how small time buyers and sellers access the market since they can't take delivery of entire train loads of goods but still need to hedge. Finance professionals trading them around to wring out an extra percent here and there it beside the point.

kqr 2y ago
No, this is a common misconception. If hedging was the point, futures markets would show more evidence of risk aversion than they do. Again, I recommend that Williams' book if you're curious!
- Marazan 2y ago
  That's only because the markets have been opened up to non-producer/consumer participants.
seanhunter 2y ago
Hedging can’t be the only point, which is something we have known since the ancient Babylonians invented futures. For every person who is trying to hedge future volatility, there has to be a person on the other side of that contract who is speculating on the possibility that the hedge guy is more frightened that they should be. You need hedgers and speculators to have a two-way market, and in markets where you have predominantly hedgers they get completely fleeced by the few speculators brave/dumb enough to take the other side of their trades. This is because many markets are structurally unbalanced such that the people who need to hedge long (producers) and people who need to hedge short (consumers) operate on different timeframes etc. So if I’m a farmer growing some crop I might want to sell the 1yr future, but the guy trying to hedge the price for purchase (wholesale grocer or whatever) will be hedging the front future like 1m out. So someone has to carry the risk in the forward curve between 1m and 1 year or noone gets the hedge they need and the market doesn’t work. Quite aside from that, there are all sorts of things which are cash-settled because you literally can’t do a physical settlement but people need to hedge (yes and speculate) anyway. Take an index future on an equity index. How are you going to physically settle a future on the SPX or (god forbid) the Russell? The liquidity consequences would be devastating to markets.

colechristensen 2y ago

>Commodity futures are not for the supply of commodities. This is a silly statement. Commodity producers absolutely do use futures markets to sell their product. >More speculators usually leads to more liquidity and more accurate deals on loans. More speculators also leads to more speculation which can lead to anywhere up to a complete disconnect of the price from anything to do with supply or demand. Case in point: onion futures are illegal in the US https://en.wikipedia.org/wiki/Onion_Futures_Act https://en.wikipedia.org/wiki/Onion_Futures_Act