NWR: Euro at $1.26 vs dollar today.

It's more than empirically true, it's the (constant and unvarying) way in which forward rates are calculated. All the changes in forward/futures rates that one sees second by second on an intra-day basis are exclusively a function of changes in the spot rates plus or minus interest rate differentials.
 
Thank you, Nicolas.

originally posted by Nicolas Mestre:
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On the other hand, many will stay the same as domaines will increase prices to keep up with the increasing costs of dry goods like boxes, bottles, and corks. Many producers kept their prices unchanged over the last few vintages in order to stay competitive in the export market, despite higher overhead costs.
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I've read that many non-U.S. producers have been holding their prices constant despite routine inflation of their factor costs.

Jonathan, your definition of gambling is very broad, and would seem to encompass about all entrepreneurial activity.
 
originally posted by Ian Fitzsimmons: Jonathan, your definition of gambling is very broad, and would seem to encompass about all entrepreneurial activity.
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How is entrepreneurial activity not gambling? You invest money in a business and are not guaranteed a return.

Same goes for all life choices.
 
I'd argue there is a conventional distinction between gambling and entrepreneurial risk-taking, but I can make sense of the counter-argument.
 
originally posted by Oswaldo Costa:
It's more than empirically true, it's the (constant and unvarying) way in which forward rates are calculated. All the changes in forward/futures rates that one sees second by second on an intra-day basis are exclusively a function of changes in the spot rates plus or minus interest rate differentials.
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The line in here that needs attending to is spot rates.

By the way, as a matter of pure empiricism, it's empirically false in the one case I know of absolutely, me. When I was buying my house, differences of as little as one penny in the exchange rate made what was to me a significant difference in the price of the house. You better bet that I thought about how I would buy Euros and at what price, and whether I should wait, lock in a rate or not. One price available to me was a forward rate. I could bet on that vs. current rate vs. what I thought the rate would be in x time (based on whatever information I had). Now, obviously, my decision wouldn't move the forward rate or the spot rate, but I assume lots of people with much more money than me are doing the same thing every moment of the day. Even if all they move is the spot rate, that of course moves the forward rate, so the speculation occurs in the same way.

Oswaldo, I'm not sure what you are arguing. If you are really arguing that buying forwards, or buying Euros, or selling either, is not a speculative activity, and can't be, I'm guessing you have a very narrow definition of speculation and we should drop the argument. If you are saying that it is a speculative activity, though it operates by rules I am describing incorrectly, then we really aren't arguing because I don't have any claims about the background rules to make, and we should also probably drop the argument.

Ian, I define gambling the way a dictionary would, to bet on an uncertain outcome, to stake something on a contingency. You are right that I don't tie to it a moral judgment that would necessitate distinguishing it from the normal course of market activity.
 
originally posted by Ian Fitzsimmons:
I'd argue there is a conventional distinction between gambling and entrepreneurial risk-taking, but I can make sense of the counter-argument.
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Sorry, I didn't see this when I replied. If by entrepreneurial you mean starting a business as opposed to playing a game or gambling on the outcome of a game, sure, there's an obvious difference. But, given what say commodities investors do--who never take possession of the commodities they buy but merely bet or invest based on their calculation of what the future will bring--it's hard to see that even that that conventional distinction (which the dictionary definition won't support) will hold for investing in markets.
 
Hi, Jonathan, I'm not arguing any point of view, just responding to the sentence "With regard to importers, for instance, what would they do when the rates for a 90 day forward are actually higher than the current rates (it happens with some frequency)." I know this sounds counterintuitive, but if forward rates are higher than spot rates, that does not mean that buying forward "costs more." Conversely, if foward rates are lower than spot rates, it does not mean that buying forwards "costs less." When you buy a currency forward, you are automatically selling your currency spot. That means that you "receive" (implicitly) the interest rate of the purchased currency and "pay" (again implicitly) the interest rate of the sold currency. The difference between what you virtually receive and what you virtually pay is exactly the difference between the spot and forward rates. It does not cost anything (beyond the bid/ask spread) to buy a currency forward, so hedging is essentially free.
 
What you are explaining is that the cost of hedging is free. You are not saying that hedging is not a speculative act, which is all I was arguing. There will always be a reason for buying the forward price or not vs. buying now and banking or there wouldn't be contracts bought and sold.

As a sidenote, it's my understanding that you are describing a theory (perhaps a true one) of how forward prices come to be what they are, but not a determined, external mechanism for setting them. There is obviously a difference between those two things and one can bet on that difference as well since even true theories of such things are only true in a longer run than instantaneously. If you are in fact describing an externally determined setting mechanism, then, of course you are right that the boundaries for speculation are more constrained, though still not right if you are claiming that one isn't doing it.
 
originally posted by Jonathan Loesberg:
.... You are right that I don't tie to it a moral judgment that would necessitate distinguishing it from the normal course of market activity.
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Did I say that? I'm impressed with myself.

originally posted by Jonathan Loesberg:
... But, given what say commodities investors do--who never take possession of the commodities they buy but merely bet or invest based on their calculation of what the future will bring--it's hard to see that even that that conventional distinction (which the dictionary definition won't support) will hold for investing in markets.
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I would say the conventional distinction I mentioned before, in the contexts of financial, equity, currency, and commodity markets, is approximately expressed by the distinction often made between 'speculators' and 'investors.'

I see that you did indeed take your definition from the dictionary. In it's broadest sense, this definition, however, also sweeps up most actions taken on the basis scientific analysis, since scientific conclusions generally are expressed in terms of statistical probabilities. Even sitting in my room could be construed as a gamble - to pick a ridiculous extreme - since there is some remote possibility that all the oxygen molecules could gather on the opposite side of the room and I might asphyxiate. There's an interesting philosophical angle to this point of view, but I would say that, in practical terms, most people operate on the basis of tacit conventions that distinguish between gambling and non-gambling purposeful activity entailing risk. Perhaps another dictionary definition "to play a game for money," can be of use here.
 
I agree that hedging can be considered a speculative act, but so can not hedging. It's a perfectly symmetrical situation, and free if one ignores trading costs, which are almost negligible to professionals.

On the other matter, though, I have to stress that I am NOT describing a theory of how forward prices are determined. That is how they are actually set in practice, everyday, at all times, in the trading desks and commodity exchanges. If you don't believe me, just ask any finance professor in your university or commodity trader. The best way to grasp this intuitively is to consider that any other situation creates arbitrage opportunities that cannot last more than a few seconds. Many trading houses have program trading software set up to take advantage of any tiny misalignment that arises. These programs buy and sell positions instantly to capture the discrepancy, with zero risk, bridging the gap and eliminating it.
 
originally posted by Oswaldo Costa:
I agree that hedging can be considered a speculative act, but so can not hedging. It's a perfectly symmetrical situation, and free if one ignores trading costs, which are almost negligible to professionals.

On the other matter, though, I have to stress that I am NOT describing a theory of how forward prices are determined. That is how they are actually set in practice, everyday, at all times, in the trading desks and commodity exchanges. If you don't believe me, just ask any finance professor in your university or commodity trader. The best way to grasp this intuitively is to consider that any other situation creates arbitrage opportunities that cannot last more than a few seconds. Many trading houses have program trading software set up to take advantage of any tiny misalignment that arises. These programs buy and sell positions instantly to capture the discrepancy, with zero risk, bridging the gap and eliminating it.
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I, of course, have asked finance professors and they have answered pretty much in line with what you say. What we are disagreeing about, now, is whether you are describing a theory (by which I do not mean a speculative statement, but, in say economic terms, a more or less accurate generalization describing how lots of specific acts and events occur but not describing how they are compelled by law or regulation to occur, and thus having variances that can be taken advantage of). The software that "takes advantage of misalignment" shows that there is misalignment and it can be taken advantage of. I did not know that market correction was this quick and thought that individual investors and group investors could be depended upon to bet on the calculations of others, or take advantage of misalignments. About that I was wrong.

Not hedging is only a speculative act if one is already investing. One could choose not to do either. There are reductio ad absurdums to everything.

This goes to Ian's distinction as well. I think there's an obvious distinction between speculating and investing in a specific business whose actual profits I will benefit from. I'm not sure there's the same distinction between investing in markets to make a profit and speculating on them except, a)if one is distinguishing between times investment is held, or b) in terms of one's judgment about the moral rectitude of the speculator or investor.

With regard to a), gambling is still gambling regardless of the time frame; and even if the equities or commodities are real, one's profit really results from a gambling game that has been set up (although in the case of equities, there are connections between a company's profit and one's own; the connections are not iron clad; in the case of commodities, one can't even go this far). The case of b) I'll stipulate if someone wants to make that distinction.
 
Yeah, I don't know where the line is drawn between speculating and investing among the cognoscenti, but would love to learn. If your finance professor buddies clear this point up, please pass the knowledge.
 
Oswaldo,

If you care to pursue this discussion, may I suggest that a couple of worked examples and then assigning a problem set is probably the way to go. Seriously, I think this stuff is easier when it is simple and explicit.

Ian,

I've never heard the cognoscenti talk about speculation, but it could be I go to the wrong bars.
 
originally posted by SFJoe:
Oswaldo,

If you care to pursue this discussion, may I suggest that a couple of worked examples and then assigning a problem set is probably the way to go. Seriously, I think this stuff is easier when it is simple and explicit.
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You may be right, but I thought I was asking a different question. Is the way one arrives at a forward set de jure by government standard or enforceable industry definition of what the instrument must represent (as in, if someone knowingly set a price that one could say did not represent x, one could get charged with fraud or something), or is it an instrument meant to represent x, taking into account differences in market estimates of what x might be, and when people set rates differently, various market forces will bring it back into line.
 
originally posted by Jonathan Loesberg:
originally posted by SFJoe:
Oswaldo,

If you care to pursue this discussion, may I suggest that a couple of worked examples and then assigning a problem set is probably the way to go. Seriously, I think this stuff is easier when it is simple and explicit.
Click to expand...

You may be right, but I thought I was asking a different question. Is the way one arrives at a forward set de jure by government standard or enforceable industry definition of what the instrument must represent (as in, if someone knowingly set a price that one could say did not represent x, one could get charged with fraud or something), or is it an instrument meant to represent x, taking into account differences in market estimates of what x might be, and when people set rates differently, various market forces will bring it back into line.
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Here you go: Wiki.
Knock yourself out.
 
The Wiki explanation depicts it as a futures contract. It's not that it's wrong, but that it omits relevant information as to how the futures price is arrived at, beyond mutual agreement. My understanding is that Oswaldo is right that a forward price is meant to represent something more specific. I also thought that "meant to represent" is governed by market forces and not some de jure arrangement and thus isn't quite as rigid as he suggests. But it would be easy enough for either he or SF Joe to tell me I'm wrong and there is de jure enforcement. I'll quibble about anything but a fact is a fact.
 
originally posted by Jonathan Loesberg:
The Wiki explanation depicts it as a futures contract. It's not that it's wrong, but that it omits relevant information as to how the futures price is arrived at, beyond mutual agreement. My understanding is that Oswaldo is right that a forward price is meant to represent something more specific. I also thought that "meant to represent" is governed by market forces and not some de jure arrangement and thus isn't quite as rigid as he suggests. But it would be easy enough for either he or SF Joe to tell me I'm wrong and there is de jure enforcement. I'll quibble about anything but a fact is a fact.
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Futures and forwards are different. Futures are standardized exchange traded contracts.
 
originally posted by Tom Glasgow:
originally posted by Jonathan Loesberg:
The Wiki explanation depicts it as a futures contract. It's not that it's wrong, but that it omits relevant information as to how the futures price is arrived at, beyond mutual agreement. My understanding is that Oswaldo is right that a forward price is meant to represent something more specific. I also thought that "meant to represent" is governed by market forces and not some de jure arrangement and thus isn't quite as rigid as he suggests. But it would be easy enough for either he or SF Joe to tell me I'm wrong and there is de jure enforcement. I'll quibble about anything but a fact is a fact.
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Futures and forwards are different. Futures are standardized exchange traded contracts.
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Are you saying that the difference between forwards and futures is merely that forwards are not traded? Otherwise the Wiki definition of a forward contractis a definition of a futures contract. And certainly both Oswaldo and others gave me to understand that there are other relevant differences. Read his message above.
 
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