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Their original role was to help farmers hedge their risk of bad harvests by setting a fixed price for future delivery of foodstuffs. Not quite they were also t
by Marazan 12y ago
Their original role was to help farmers hedge their risk of bad harvests by setting a fixed price for future delivery of foodstuffs.
Not quite they were also to allow downstream businesses to fix their inventory costs, that would be the hedgers that you allude to. That is the original purpose of a futures market to allow both the suppliers and consumers to hedge risk.
Initially futures markets were restricted to individuals and businesses that dealt in the product covered by the futures contract, but over the years 'speculators': actors who at no point want to accept a delivery of the product managed to get themselves into the system. Speculators are simply middlemen between the actual producers and actual consumers of the futures product. They do not add value to the system, literally the last thing in the world they want to happen is to actually have two containers of pork bellies turn up at their door step.
Futures markets work absolutely fine without speculators as their is intrinsic value in a futures market for both producers and consumers without a revolving cavalcade of middlemen getting in the way of settling contracts.
- pdovy 12y agoSpeculators get a bad rap, but actually play a pretty important role in futures markets by aiding price discovery and providing a more efficient transfer of risk between hedgers. To make money they need to try and accurately forecast where prices will move, and to do so will incorporate any and all available information - it is literally their job to try and know everything there is to know about what will effect commodity prices. There has also been quite a bit of academic research on the effect of speculation in futures markets, and by and large the conclusion seems to be that they help, rather than hurt these markets and rises in commodity prices have been driven mostly by external factors [1]. [1] http://www.forbes.com/2011/05/24/oil-speculators-are-your-friends.html http://www.forbes.com/2011/05/24/oil-speculators-are-your-fr...
- ahi 12y agoThe article referenced doesn't seem to support your statement.
- pdovy 12y agoI'm not sure how you could come to that conclusion, given that after discussing numerous studies the article concludes with the summary: "The upshot is that futures markets–and the speculation that occurs therein–provide a public service. Regulating, restricting, or eliminating those markets would not bring prices down or make them more predictable."
- ahi 12y agoYou reminded me of a classic DailyWTF: http://thedailywtf.com/Articles/Special-Delivery.aspx http://thedailywtf.com/Articles/Special-Delivery.aspx TL;DR Coal futures trader accidentally takes delivery of coal barges at his harbor district office building.