At Man, we've got quite a history with commodities, trading everything from rum to pork bellies. One way we trade commodities is with #Futures, lets learn what a future is and also why we don't trade Onion futures!
#TradingExplained #QFDebunked #QuantFinance
1/11
#TradingExplained #QFDebunked #QuantFinance
1/11
So, what's a #future? A future is like a promise - it's a legal contract to buy or sell something at a set price, at a set time in the future. But why would someone want to make that promise? Let's use a simple example.
2/11
2/11
Meet our farmerπΎand bakerπ. The farmer grows wheat and the baker uses it to make bread. The farmer promises to sell his wheat to the baker when it's grown, at a set price. This works well for both parties - lets see why...
3/11
3/11
The farmer can focus on growing the wheat, knowing he's already secured a sale at an agreed price. The baker knows exactly what she'll pay for wheat, so she can focus on crafting the best bread. It's all about reducing risk and uncertainty.
4/11
4/11
The farmer-baker agreement is much like a "forward": a custom agreement between two parties. But futures take it further: they're traded on a central exchange, with standardized contracts. Think of it like a supermarket: you don't negotiate contracts with every producer.
5/11
5/11
Futures have a rich history. Chicago started trading grain futures in 1864, and Japan traded similar rice contracts as early as 1697. Today, futures exist for almost anything you can imagine, from Bitcoin to Milk. But onions? That's a unique case... π§
6/11
6/11
A bit of history: Onion futures were a big deal in the 40s and 50s. But in 1955, two traders manipulated the onion market, leading to huge price swings, bankrupting many farmers. The public outcry was massive. #OnionGate
7/11
7/11
The U.S. Senate and House held hearings, and then-Congressman Gerald Ford sponsored the Onion Futures Act, banning futures trading in onions. President Eisenhower signed the bill in 1958, and that's why we don't trade onion futures! π§
π«
en.wikipedia.org
8/11
en.wikipedia.org
8/11
Interestingly, some academics have suggested that the ban on Onion futures has led to more price volatility in the onion market compared to other commodities. For more, check out: jstor.org
9/11
9/11
We hope this thread has helped illuminate the world of futures, demonstrated how they work, and why they serve as a useful tool for managing risk (uniquely across time scales: both short- and long-term).
10/11
10/11
Keep an eye out for more insights on futures trading in upcoming threads. We'll delve into the concept of "margin", its relationship with futures, and how futures prices are set. Until next time, happy trading! π
11/11
11/11
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