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But isn’t the point that futures trading reduces volatility from things like weather?
by brookst 7d ago
But isn’t the point that futures trading reduces volatility from things like weather?
- hyperhello 7d ago“Absorbs” volatility might be more accurate.
- brookst 7d agoI will resist the urge to inquire about the difference between reducing and absorbing.
- collingreen 7d agoI won't. What's the difference here between resisting and absorbing volatility?
- kennywinker 7d agoNot a financial expert, but i think reduce implies it goes away, and absorb implies it’s still there but someone is taking it up. Like reducing the amount of water on the floor would be turning off the tap. Absorbing the amount of water on the floor is when you mop it up.
- hyperhello 7d agoThat’s exactly what I meant. I was only replying to the question as posed.
- harpiaharpyja 7d agoOr to bring it back to the original context... Reducing volatility would be reducing the impact of bad weather on your harvest, absorbing volatility is finding someone to cover your losses. (presumably by giving up some profits on the good years. It's like a financial low pass filter)
- SR2Z 6d agoVolatility is a natural consequence of weather, blight, etc., etc. To reduce volatility you would need to actually stabilize the supply of onions. What futures do is allow traders to shift risk from the future to the present. By pricing that risk, it's possible for people who depend on onions to pay a little more now in exchange for a guarantee about the future. It's not magically going to make onions less volatile (although high risk prices can spur investment which might) but it can reduce disruptions caused by volatility. The classic example of this is futures on jet fuel which allow airlines to weather random wars in the middle east, OPEC shenanigans, etc. Ticket prices are higher this way, but the existential threat of being forced to cancel a bunch of flights is gone.
- brudgers 7d agoThe point is making money.
- mhh__ 7d agomany users of derivatives willingly lose money on them because the purpose of these contracts is to transfer risk to those willing to hold it.
- brudgers 7d agoMoney is the thing at risk.
- chadgpt6 7d agoIs insurance risking your money?
- brookst 6d agoYes of course. I’ve paid for car insurance for 30+ years and have never made a single claim. So far, for me, it’s a bad risk. I’ll keep paying though.
- articulatepang 7d agoPeople are willing to lose a small but predictable amount of money to avoid occasionally and unpredictably losing a massive amount of money. The former is a loss they can plan for and absorb. The latter might kill their business. Traders are often happy to take the other side of that trade because they can trade against many counterparties, collect a small premium from each one, and try to ensure their counterparties won’t all fail in a correlated way.
- brudgers 6d agoYes, it's not about onions.
- 6d ago
- deleted 7d ago[deleted]
- quickthrowman 7d agoFutures are a mechanism to transfer risk from one party to another, more or less.
- brookst 6d agoTo reduce net risk for both parties, at the expense of also reducing chances of windfalls. To the farmer, futures mean no risk of having to sell when prices are low. To the buyer, futures mean no risk of having to buy when prices are high. The farmer also gives up the chance of selling when prices are high, and the buyer gives up the chance of buying when prices are low. The transfers go both ways, which is the magic.
- quickthrowman 6d agoYou’re leaving out the speculators who usually end up assuming the risk of both the producer and buyer.