{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

chapter4 - CHAPTER 4 Using Futures Markets In this chapter...

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 4 1 CHAPTER 4 Using Futures Markets In this chapter, we discuss the different ways that futures markets serve different members of society. This chapter is organized into the following sections: 1. Price Discovery 2. Speculation 3. Hedging
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 4 2 Price Discovery Because the futures market incorporates the collective opinion of many buyers and sellers, the futures market can be used to reveal information about future spot prices. The usefulness of forecasting future spot prices, based on current futures prices, depends upon three factors: 1. Information : the need for information about future spot prices. 2. Accuracy : the accuracy of the futures market forecasts of those prices. 3. Performance : the performance of futures market forecasts relative to alternative forecasting techniques.
Image of page 2
Chapter 4 3 Information Interest Rates and Home Buying You are in the market for a new home and you want to have an idea of how interest rates will behave in the next year. By examining the WSJ, you can discover what the market as a whole thinks about the future course of interest rates. If the interest rate (yield) on bonds to be delivered in six months is three percentage points lower than current interest rates, then there is good reason to expect that interest rates will fall over the next six months. Furniture Manufacturer A furniture manufacturer needs to print its catalog for the next year and needs to include prices. Furniture prices will depend in part upon next year’s lumber prices. The furniture manufacturer can review the lumber futures market to estimate the costs of the wood. The person using the futures market to estimate the future course of interest rates or the future course of lumber prices is using the futures market for its price discovery benefit.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 4 4 Accuracy We would like the estimator of the expected future spot price to be accurate. If it is not accurate, its usefulness is limited. A forecast estimate is unbiased if, on average, the forecast is correct. However, even if a forecast estimate is unbiased, the range might be so wide that its usefulness is limited. Example I predict that the points scored by the winner in the NBA finals game will be between 50 and 150 points. On average, I might be right, but the range is so wide that it not particularly useful. Futures prices sometimes have large errors and these may differ across commodities.
Image of page 4
Chapter 4 5 Performance Evidence suggests that while futures markets have large errors, they are generally better at predicting the future than any other available methods of forecasting. Because of this property, military researchers have suggested using futures contracts to predict terrorist attacks.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Chapter 4 6 Forecasting Oil Prices A Case Study Table 4.1 illustrates a case of a large forecast error.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern