Zero Sum Game???
- Thread starter Swish
- Start date
20 cents - Actually the topic can be a very interesting one, and very roughly:
For stock quantity-wise, surely the stock market is a zero-sum game of which the price dynamics would be more likely subject to supply and demand dynamics, because within a certain time span the total number of shares is a constant.
However for futures quantity-wise, even if the futures market is a zero-sum game its price dynamics (posssibly hardly following supply/demand dynamics) could be quite different from stock market, since the total number of contracts (within a time span) between buyers and sellers can be theorectically unlimited.
Q
Ask (Interviewer): So the way shares are accumulated is different in the futures market compared to the stock market.
Reply (Philip Gotthelf): In the futures market, accumulation is real, whereas in the stock market, it is fiction. I like to follow the accumulations because if people are accumulating a particular currency, that means that in the initial stage of accumulation the currency has to rise, and in the secondary stages of accumulation, the currency has to be weakened. ...
--- "Understanding The Forex Market with Philip Gotthelf", TASC, Dec 2003 issue
UQ
It'd be interesting to know just how many farmers (or other "real" users of the commodities) actually hedge. I know somebody who once tried to find out. Chicago didn't seem to have any records like that (that he could find), nor did anybody seem to know of any "bona-fide" hedgers. His conclusion was that the vast majority of trades are speculators. He conceded however, that he was not extremely thorough, so it would be interesting to find out if anybody has done solid research on this.
This only refers to the commodities, obviously there are plenty of financial instrument hedgers and arbs.
I am familiar with the natural gas and crude oil industries and oil & gas companies often hedge - in fact almost always hedge some portion of their future production. Once company I know which actively acquires will hedge all of their forecasted production as a matter of policy from the acquired asset as far out as they can in order for their actual revenues to simulate their forecasted revenues as much as possible.
Also, I know Southwest Airlines actively hedges their jet fuel purchase needs - one year other carriers where continuously moaning about fuel prices and LUV had hedged their entire supply at like 50-60% of what other companies were having to pay on the spot market.
Finally, I had a friend whose family raised cotton in Texas in the 70's and 80's. Every spring the father would be confronted with the decision as whether or not to sell his crop (no volume commitment as he did not know what his yield would be - volumes varied greatly year to year) to the government even before it was planted. I guess this was some government program that interacted with the futures market in some way.
All this said, futures usage by commodity producers are a valuable actively used means of managing risk. I'm sure most of these guys are not actively moving in and out of positions, but hold their positions longer than futures speculators do......
Swish
Also, I know Southwest Airlines actively hedges their jet fuel purchase needs - one year other carriers where continuously moaning about fuel prices and LUV had hedged their entire supply at like 50-60% of what other companies were having to pay on the spot market.
Finally, I had a friend whose family raised cotton in Texas in the 70's and 80's. Every spring the father would be confronted with the decision as whether or not to sell his crop (no volume commitment as he did not know what his yield would be - volumes varied greatly year to year) to the government even before it was planted. I guess this was some government program that interacted with the futures market in some way.
All this said, futures usage by commodity producers are a valuable actively used means of managing risk. I'm sure most of these guys are not actively moving in and out of positions, but hold their positions longer than futures speculators do......
Swish
For some insight here...corn yields in my part of the country on non-irrigated land run from 110 to around 200 bushels per acre depending on size of the field. Different parts of a field produce more or less. There are very few small farmers left. I think I read a few years ago that less than 6% of the farmland in the U.S. is controlled by farmers owning less than 1,000 acres. Soybeans yield from 35 to 70 bushels an acre. Next, the grain bin on the family farm where I worked, the big bin, held around 26,000 bushels. There were several other bins ranging in size from 4,000 to 12,000 bushels. How many contracts does this represent?
I would say the people who actually hedge are the grain companies who store grain for the farmer to sell. These people will charge for the storage in their huge grain bins and for cleaning and drying the grain. Obviously, they have to have insurance to protect this inventory until it is sold by the owner, whoever that is. They can hedge their risk by offering the farmer or other owner a price linked to the actual cash price of the commodity, less storage, drying and cleaning costs. They can protect themselves against an adverse price move by taking an opposite position in the futures market, depending upon how much inventory they have, what the market demands and how much they expect to be brought to them for immediate sale or storage.
Here is an easy way to understand how markets are a Zero Sum Game. If the sum of the MAJOR gyrations is greater than (ie a multiple of) the net trend up or down in the same period then the theoretical zero can be taken as the mid-point of the extremities (hi/lo) during that period (eg one day, one week or one year).
What illustrates that most markets most of the time are zero sum plays is when you can see that the gyrations in sum are greater than the net trend.
Lets take the DOW Friday (19 Dec) from the Open: down 40, up 40, down 50, up 40 for a day net move Open to Close of down 10 (all figures very approximate).
What illustrates that most markets most of the time are zero sum plays is when you can see that the gyrations in sum are greater than the net trend.
Lets take the DOW Friday (19 Dec) from the Open: down 40, up 40, down 50, up 40 for a day net move Open to Close of down 10 (all figures very approximate).
