The very many questions-not-worth-their-own-thread question thread XXV

[Mouthwash]

So our only hope is a billionaire fanboy who doesn't want the series to crash and burn?

 

[Antilogic]

Maybe, or a crowd-funded project that catches fire on kickstarter or something like that.

 

[Hygro]

How do you infer current spot prices from futures contract prices?

I'm doing a google myself but if someone else's google fu is stronger than mine then that would be a great help too!

I look up the local elevator, then look at the prices per month, they'll be like two dozen different prices, if the month isn't here yet, it's a futures contract. Then try and determine what the hidden costs are going to be, moisture dock, drying dock, storage fee, basis. Is this at all what you were asking? Most people aren't actually making futures contract with the intent to deliver or purchase the base good, but some are.

Well. Sort of. The problem is my specific problem isn't a standard future contract, but a special contract that I'm trying to value... From what I've read so far, the differences between a future price and a spot price is (a) quantity risk and (b) price risk. For example if the purchaser believes that there will be price increases they might want to pay extra to lock in the price today, or if they believe that there will be difficulties securing enough goods, they might pay extra to lock in a guaranteed supply. So the standard literature I've found tells me that the present price is the future price minus the quantity risk and price risk premium. Now, the application I'm looking at excludes price risk, because actually they're paying a premium over the future spot price. So say they buy a future contract for 100 units of goods in March 2014, under the contract I'm looking at, they will pay e.g. 1% above the spot price in March 2014. So that 1% represents the value of the quantity risk to the purchaser, and completely excludes the price risk premium. What I really want to be able to do is determine what future spot price they are expecting, based on that 1% premium they're paying. Unfortunately, the way the contract is structured prevents me from doing that I think...

Yeah I figured it was a Cutlass/Integral/Hygro/JH/Whomp question - sadly only a few of them are left! Perhaps there are young finance guys who can take up the torch...

First props to Farm Boy for the most OG answer possible.

The basic theory may leave a lot lacking, since you already had it. The future is 1% above the present future spot price, which is the current price plus expected price change. Whatever currency you're using and what commodity we are using informs this, but you can basically say it's

E * (1+0.01+R) = F

E=current spot price
F=future spot price
R=your exogenous variable for commodity appreciation expectations, including risk, interest minus inflation, etc.
0.01=their premium
1=makes the math work ;p


I'm not entirely sure what you actually need but if they're paying 1% premium and they aren't the market, then subtract off that 1% and you should have the expected futures spot without their premium.

So subtract the 1% of the Future Price You Know to get F, then subtract what you deem R (the value of parking in a financial instrument, as fine tuned as appropriate), and you get E.

Let me know what's up.

 

[Farm Boy]

Ok, gotta ask, what on earth does "original gangsta" mean in this context of me reading a question before the coffee kicked in?

 

[bhsup]

Well, now I gotta ask... Isn't 1:15am a tad early even for an early to bed, early to rise farmer??

 

[Hygro]

Ok, gotta ask, what on earth does "original gangsta" mean in this context of me reading a question before the coffee kicked in?

Man, what's more OG than telling some London financial consulting type kid how to price commodity futures than giving the perspective of the commodities producer going to the commodities market? Futures were designed for agricultural commodities and you gave him the real story.

You don't bundle a risk premium with rates of return as some exogenous variable, you went and told him exactly how an OG commodities producer examines a futures contract by going to the actual joint and running calculations of the production cycle of the actual goods themselves against the market.

That was keepin' real real real.

 

[Farm Boy]

Well, now I gotta ask... Isn't 1:15am a tad early even for an early to bed, early to rise farmer??

Gin! Actually drank and played the vidya games last night. Kiddo doesn't care how late I stay up though. =/

Man, what's more OG than telling some London financial consulting type kid how to price commodity futures than giving the perspective of the commodities producer going to the commodities market? Futures were designed for agricultural commodities and you gave him the real story.

You don't bundle a risk premium with rates of return as some exogenous variable, you went and told him exactly how an OG commodities producer examines a futures contract by going to the actual joint and running calculations of the production cycle of the actual goods themselves against the market.

That was keepin' real real real.

So, between the Urban Dictionary's " this" and " that," I'm shaking a cane at the young'uns? I'm not that much older than you boyeee.

Edit: so I am apparently too white to quote the urban dictionary and the filter kicked in.

 

[bhsup]

You've revealed too much about yourself. I found you!

 

[Farm Boy]

Dammit, I told them not to upload that!

 

[Mise]

First props to Farm Boy for the most OG answer possible.

The basic theory may leave a lot lacking, since you already had it. The future is 1% above the present future spot price, which is the current price plus expected price change. Whatever currency you're using and what commodity we are using informs this, but you can basically say it's

E * (1+0.01+R) = F

E=current spot price
F=future spot price
R=your exogenous variable for commodity appreciation expectations, including risk, interest minus inflation, etc.
0.01=their premium
1=makes the math work ;p


I'm not entirely sure what you actually need but if they're paying 1% premium and they aren't the market, then subtract off that 1% and you should have the expected futures spot without their premium.

So subtract the 1% of the Future Price You Know to get F, then subtract what you deem R (the value of parking in a financial instrument, as fine tuned as appropriate), and you get E.

Let me know what's up.

I should have explained it more clearly, they're not giving me "F" at all -- they're literally just bidding the 1%. And it's not 1% above the current price, but 1% above the price at the delivery date. Basically, there are two sets of auctions going on, one for goods delivered today, and one for goods delivered at some future date. The goods delivered today follow a standard English auction, in which the price starts low and ends high. The price at which the goods are sold sets the current market price in the current month. Then the auctions for goods delivered at future dates take place, but the price is relative to the market price when it is delivered. So they'll be bidding in January for a consignment of goods in March (say), and they'll start bidding at 97.5% and bid up and up until someone wins, say, at 101%. That means that they will pay 101% * the price of the goods in March. The price of the goods in March is determined by the standard English auction that takes place in March.

Let's use the following table as an example of spot prices in each month:
Jan: $500
Feb: $505
Mar: $502
Apr: $506

In January, there's an auction for a consignment of goods to be delivered in March. The auction takes place and the winning bidder (call him Alan) wins at a price of 101%. Alan has no idea what the price will be in March, but whatever that price is, he will have to pay 1% more than that. In this example, the standard spot auction takes place in March and the winner of that auction paid $502. This means that Alan pays 101% * $502 = $507.02 in March for the goods he won at auction in January.

Does this make sense? Am I right in saying that the structure of this auction strips out any pricing information? That it only tells me what their quantity risk premium is? (1% in this example)

 

[Loppan Torkel]

What's your opinion of Bill Willingham's Fables series? well written/illustrated?

 

[Hygro]

Gin! Actually drank and played the vidya games last night. Kiddo doesn't care how late I stay up though. =/



So, between the Urban Dictionary's " this" and " that," I'm shaking a cane at the young'uns? I'm not that much older than you boyeee.

Edit: so I am apparently too white to quote the urban dictionary and the filter kicked in.

You weren't being OG because you're old, you're being OG because your pricing method is OG.

I should have explained it more clearly, they're not giving me "F" at all -- they're literally just bidding the 1%. And it's not 1% above the current price, but 1% above the price at the delivery date. Basically, there are two sets of auctions going on, one for goods delivered today, and one for goods delivered at some future date. The goods delivered today follow a standard English auction, in which the price starts low and ends high. The price at which the goods are sold sets the current market price in the current month. Then the auctions for goods delivered at future dates take place, but the price is relative to the market price when it is delivered. So they'll be bidding in January for a consignment of goods in March (say), and they'll start bidding at 97.5% and bid up and up until someone wins, say, at 101%. That means that they will pay 101% * the price of the goods in March. The price of the goods in March is determined by the standard English auction that takes place in March.

Let's use the following table as an example of spot prices in each month:
Jan: $500
Feb: $505
Mar: $502
Apr: $506

In January, there's an auction for a consignment of goods to be delivered in March. The auction takes place and the winning bidder (call him Alan) wins at a price of 101%. Alan has no idea what the price will be in March, but whatever that price is, he will have to pay 1% more than that. In this example, the standard spot auction takes place in March and the winner of that auction paid $502. This means that Alan pays 101% * $502 = $507.02 in March for the goods he won at auction in January.

Does this make sense? Am I right in saying that the structure of this auction strips out any pricing information? That it only tells me what their quantity risk premium is? (1% in this example)

Before we go any further, is it the case that not only do you know have a F price but you actually don't have an E price either? If you do have an E price than we can make this as easy or hard as you'd like.

 

[Mise]

I have an E price in January, but not one in March. Nobody knows what that will be until the March auctions happen. What Alan pays is E_march * 101%. I want to figure out if I can use the 101% to determine what E_march is before hand. I.e. does the 101% give any indication of future price expectations, or is it just giving me what their quantity risk is and nothing more?

 

[Hygro]

I have an E price in January, but not one in March. Nobody knows what that will be until the March auctions happen. What Alan pays is E_march * 101%. I want to figure out if I can use the 101% to determine what E_march is before hand. I.e. does the 101% give any indication of future price expectations, or is it just giving me what their quantity risk is and nothing more?

Okay, cool. The equation is the same as above only you get to plug in the E value making it more straightforward. That doesn't really help, I know. I don't have enough a finance background to know if this 1% extra is any specific indication of anything.

It would strike me, though, that Alan either is expecting the price to drop and wants to lock in his purchase, or needs the product bad enough and for whatever reason doesn't want to pay now.

If I were to guess a future price I'd run the usual gamut: historical trends of product, similar for competing/substitute products, check input costs (and against production cycle), and see if there's any other correlations to be aware of (biotech stock prices are highly, consistently seasonal. At least up through 2011 when I learned that.) And any other things you can suggest to me to help me in my own learning ;D

 

[bhsup]

What in the blue blazes does "totes magotes" mean? Actually, I don't really need that answered. What I want to know is why would any reputable company use such an ridiculous obscure term that nobody over the age of 20 has probably ever heard of, much less used, in advertising?

I mean, I am actually a Sprint customer and I love them, but that commercial almost makes me embarrassed about being a Sprint customer.

 

[Borachio]

Link to video.

So, they're trying to appeal to the under 20 demographic. I expect they've done the calculation that the number of customers they'll lose from embarrassment will more than be offset by new customers.

 

[Hygro]

What in the blue blazes does "totes magotes" mean? Actually, I don't really need that answered. What I want to know is why would any reputable company use such an ridiculous obscure term that nobody over the age of 20 has probably ever heard of, much less used, in advertising?

I mean, I am actually a Sprint customer and I love them, but that commercial almost makes me embarrassed about being a Sprint customer.

All the companies are moving on hipster slang now that we're past the hipster era. It's bothering me, too.

edit: x-posted video.

 

[bhsup]

But who gives two shakes about them?

 

[Hygro]

About whom?

 

[bhsup]

But who gives two shakes about them?

About whom?

So, they're trying to appeal to the under 20 demographic.

^ Them.