Chapter

Futures Prices

Hendrik S. Houthakker and Peter J. Williamson

in The Economics of Financial Markets

Published in print December 1996 | ISBN: 9780195044072
Published online November 2003 | e-ISBN: 9780199832958 | DOI: http://dx.doi.org/10.1093/019504407X.003.0010
Futures Prices

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The previous chapter outlined the nature of futures contracts and some of the institutional aspects of the markets in which they are traded; this chapter analyzes the forces that determine the prices of different futures contracts, their relationship to the current market price (known as the spot price), and derives a satisfactory theory of futures prices. Different determinants are explored of the prices of both commodity futures (contracts based on a tangible commodity) and financial futures (those based on another financial instrument or index). After looking at the role of futures in ‘programme trading’ and the realities of so‐called portfolio insurance through the use of futures and options – a concept that was put to the test by the ‘Black Monday’ crash of 1987 – the chapter concludes by discussing futures as an investment. The five sections of the chapter (which is a discussion with respect to the USA) are as follows: Profits and losses on various transactions; Relations among spot and futures prices; Hedgers, speculators, and market equilibrium; The role of expectations; and Futures and portfolio management.

Keywords: commodity futures; financial futures; futures contracts; futures markets; futures prices; hedging; investment; losses; market equilibrium; market options; prices; portfolio insurance; portfolio management; profits; speculation; spot prices; USA

Chapter.  12290 words.  Illustrated.

Subjects: Financial Markets

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