What Makes A Successful Futures Market? 1.Price Volatility No volatility – Why trade? 2.Active Commercial Trade Multiple competitors who face risk and need futures Trade not dominated by small number of companies/individuals 3.Easy/efficient arbitrage between futures and commercial markets.
What Conditions Create Easy Arbitrage? Quality of Price Discovery Futures price must be true benchmarkFutures price must be true benchmark Cash price must be readily availableCash price must be readily available No entry barriers to exchange or commercial marketsNo entry barriers to exchange or commercial markets
Do the NYBOT Markets Meet Criteria? Benchmark Active Cash Easy Access Sugar #11 YesYesYes Coffee “C” YesYesYes Cotton #2 YesYesYes CocoaYesYesYes FCOJYesNoYes PulpYesNoYes EthanolYesNoYes
The Necessary Condition for a Successful Futures Market A strong, visible & continuous relationship between cash & futures
But….. even the best designed futures contract cannot eliminate Basis Risk* * Basis - The difference between the spot or cash price of a commodity, and the futures price of the same or related underlying item.