Question

Why the establishment of a futures market in a commodity should not have a significant impact...

Why the establishment of a futures market in a commodity should not have a significant impact on prices in the spot market for that commodity.

Homework Answers

Answer #1

The establishment of a futures market in a commodity should not have a significant impact on prices in the spot market for that commodity because futures are zero sum game.Commodities future contracts agreements to buy or sell a raw material at a specific date in the future at a perticular price.If the prices of the underlying commodity goes up,the buyer of the futures contract makes money.If the price goes down,the future seller makes money.Losses and gains to futures contracts are net to zero,thus should not have significant impact on prices in the spot market for that commodity.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Explain in 500 words why the establishment of a futures market in a commodity should not...
Explain in 500 words why the establishment of a futures market in a commodity should not have a significant impact on prices in the spot market for that commodity.
Assume that there is a forward market for a commodity. The forward price of the commodity...
Assume that there is a forward market for a commodity. The forward price of the commodity is $45. The contract expires in one year. The risk-free rate is 10%. Now 6 months later, the spot price is $52. What is the forward contract worth at this time? Explain why this is the correct value of the forward contract in 6 months even though the contract does not have a liquid market as a futures contract does.
how futures contracts are traded in the commodity market?
how futures contracts are traded in the commodity market?
What should the Spot price? 18-month Futures price is $85 for a commodity Risk free rate...
What should the Spot price? 18-month Futures price is $85 for a commodity Risk free rate at time of spot is 5%. The asset has a convenience yield of 1%. Using excel
58. About the Term Structure of Commodity Prices : A. Contango refers to futures prices that...
58. About the Term Structure of Commodity Prices : A. Contango refers to futures prices that rise with time to maturity (The futures price trades below the expected spot price) B. Backwardation implies a negative roll yield C. Contango implies a positive roll yield D. Backwardation refers to futures prices that decline with time to maturity (The futures price trades below the expected spot price) 59. About the components of Commodity Futures Excess Returns: A. The key driver of the...
Why did the ETF invest in the Futures and not the Spot Market for gold?
Why did the ETF invest in the Futures and not the Spot Market for gold?
Which one of the following is an example of Agricultural Commodity Futures Markets studied in this...
Which one of the following is an example of Agricultural Commodity Futures Markets studied in this course? a. Kansas City Board of Trade (KCBOT) b. Minneapolis Grain Exchange (MGE) c. Tokyo Grain Exchange (TGE) d. All of the above A good predictor of the local cash price in a given location is the ______ contract price adjusted for a multiple year average historical basis. a. spot b. futures c. local d. market
(4) Why did the ETF invest in the Futures and not the Spot Market for gold?...
(4) Why did the ETF invest in the Futures and not the Spot Market for gold? (10 points)
Cash Flow Hedge: Long in Commodity Futures The Hershey Company uses futures to lock in the...
Cash Flow Hedge: Long in Commodity Futures The Hershey Company uses futures to lock in the cost of cocoa products it needs to produce its products. Hershey forecasts that it will need 500 tons of cocoa beans in 90 days to manufacture its products. On February 10, 2020, it purchases 500 tons of cocoa bean futures at $2,000/ton for delivery on May 10, 2020, and makes a $5,000 margin deposit. The long futures position qualifies as a cash flow hedge...
Define futures contracts in finance. Why do we need them? Give an example from Commodity, Currency...
Define futures contracts in finance. Why do we need them? Give an example from Commodity, Currency and Financial futures. Also, name one index futures from each category.