> You're just betting as a hedge just in case that person wins.
But this itself is a form of market distortion. It calls to question what, precisely, people think the market is supposed to be measuring, both in theory and in practice.
But this itself is a form of market distortion. It calls to question what, precisely, people think the market is supposed to be measuring, both in theory and in practice.
I'm starting to think that the answer is what mhh__ wrote: who cares? Markets aren't there to measure anything. Markets are there to make money for participants. Any measurement that can be attributed to the markets under some conditions is, at best, an incidental side effect.
Calling some of those effects "distortions" is a tricky business at best.
Large trading firms exist on finding and exploiting small arbitrages between various correlated assets. If you assume a perfect market with infinitely many participants and infinite liquidity, then this “works” - there is no distortion at scale.
Apparently it's onions and box office returns? What weird corner cases. Why not strawberries too?
Can't the onions futures market be regulated the same way as all the others?
If anything, this makes me think all the rules are arbitrary.
Nothing (at least for other perishable foodstuff); law often doesn't even in theory have a broad universal theory behind it, but instead responds narrowly to observed or perceived immediate problems.
You're saying the answer to the above question is "because there was an immediate problem with onion futures in the 50s". I don't think that's what they meant. That would be unrelated to "the fact that futures markets are so heavily regulated".
I guess if everyone has a different opinion, and every reply comes from a different person, there's no "discussion" as I understand it.
We saw Trading Places.
If it's an extremely dry year, you profit from the weather futures instead of your crops (and vice versa). Buying weather futures isn't necessarily a prediction of what you think the weather will be.
If you have a higher risk tolerance, you will buy fewer futures. If you believe the next year will be dryer than normal, you will buy more futures than normal. If you believe your crop is likely to be better/more reliable than normal, you will buy fewer futures.
The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures.
The same way you shouldn't buy more flood insurance if you think the next year will be exceptionally wet. You can't really predict that, after all. You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup.
And I'll reiterate, this is a function of your risk-aversion/efficiency. One would expect, for example, climate change to increase the price of weather futures as extreme/problematic weather events become more likely. It's often difficult to see the impact of these changes on the scale of a single farmer, but in aggregate lots of farmers do a market make.
> You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup.
And the insurance companies have a small army of actuaries who make sure that the prices they provide take into account conditions like the relevant risk factors of where your home is. This is instead of a betting market style concept, where you could instead imagine every individual actuary as a potential insurer.
The cost of that varies though. If you have to pay $95 to get a $100 payout that’s a very different calculus from $50 for $100.
Sure, but if I, a non-farmer market player that couldn't give two fucks what the market is even about, can predict that the next year will be dryer than normal, and to what degree, better than anyone, I can make money buying up however many of these futures I can afford. It works even better if I can actually make the weather more dry somehow.
This, I believe, is called "providing liquidity to the market", but curiously, if I tried that with flood insurance, I'd just be guilty of insurance fraud.