Futures trading zero sum game
Barry Ritholtz has a post about the zero-sum-ness of things. Good thing I have my own danged blog. But equity and hedging markets, when they function properly, are positive sum games for an economy as a whole. So, we — the existing shareholders — sell part of our stake in WhizCo by issuing stock. It sells very, very well. WhizCo rakes in profits, and its stock skyrockets.
Clearly, the recent purchasers of WhizCo gained from our sale of stock. But did the sellers, the existing stockholders lose? There is no legitimate opportunity cost inherent in the sale, because the stock price would not have gone up if WhizCo had not sold stock futures trading zero sum game finance its project! They exist for firms to obtain financing for risky ventures at the lowest rational prices, so that wealth-creating ventures that might otherwise not have occurred do occur.
Traders function is to price stock accurately. Traders play a zero sum game — Barry is right about that — that is esteemed more than betting horses only because it contributes to the positive sum game of discriminating between the worthy and the unworthy in the financing of risky ventures. But it was not always thus, and will not be thus for long. Financial markets that forget who they are financing and why have a way of undoing themselves.
Futures markets exist for hedgers. The role futures trading zero sum game speculators is to price risk. Futures trading zero sum game can take year-in-advance orders from European customers because they can hedge the currency risk.
When an order is placed in Euros, WhizCo buys dollars for Euros via 1-year-ahead futures positions. Knowing exactly how many dollars they will receive in a year, WhizCo is able to price its goods without assuming currency risk. They would not be able to afford to enter the European market if doing so would require them to risk selling in Euros, but getting paid a fraction of their dollar costs because the Euro has plummeted by the time they make delivery.
Sometimes they gain on the futures, and someone else loses. Best commodity option trading book to learning they lose, and someone else gains. But WhizCo does not buy futures in isolation. By hedging legitimate orders, it in fact neither gains or loses by entering into the futures trade, but exactly offsets the change in the value of its Euro revenues.
WhizCo gains overall, because it would not have built a large, wealth producing business in Europe had it not been able to hedge. This is a win-win scenario, positive sum. By definition, market share, or any relative valuation, is zero sum. But stock markets and hedging markets are not about rankings. They are important institutions involved in positive sum wealth creation.
The zero-sum games played by traders serve to increase the total absolute sum wealth of an economy relative to what would have been, had reasonably priced hedging and risk-tolerant financing not been available. This piece actually published The date and ordering of posts is now correct. The previous post has had its time in the sun. Date fixed 6: This entry was posted on Wednesday, October 11th, at 9: You can follow any responses to this entry through the RSS 2.
Both comments and pings futures trading zero sum game currently closed. Well, good old banks are also able to finance entrepreneurs. Then private equity, then public equity. The question of whether, say, a stock market is poistive sum given other capital sources, is an emptical question based on the efficiency of stock market capital allocation vs other sources.
A similar question applies to public futures markets vs private insurance or OTC forward contracts. If public markets are more efficient than, say, bank finance or private equity in both choosing good projects and financing them at adequate scale, then public markets are net positive sum. These are important subtleties. Futures trading zero sum game obviously, this last bit is very speculative.
Thanks for a good and very succintly made futures trading zero sum game. I wish my response were as elegantly concise. Excellent appraisal of nonzero sum economics. I got here from Big Picture. If you gamble on the future, futures trading zero sum game losses, someone wins. But markets in commodities, for example, are positive sum… everybody wins. I am not saying that everything is always a zero sum game — not even close. But I do believe that many more things are zero sum than people realize.
Steve Randy Waldman writes:. Laurent, Good point, but subtle.