Class Notes (810,567)
Canada (494,151)
Economics (582)
ECON 2720 (30)
B Ferguson (26)
Lecture 6

Week 6.pdf

3 Pages
Unlock Document

University of Guelph
ECON 2720
B Ferguson

Lecture 16 February 10, 2014 10:32 AM Derivatives, Futures and Options - It has been reported that Shakespeare bought up a lot of grain during harvests and then selling it later in the year when prices are higher - Although this may seem very capitalist, if no one did this the area would run out of grain and people would starve during off harvest times - This is known as the spot market - Futures contracts refer to contracts for grain in the future before it is actually produced - John Maynard Keynes was known to trade wheat futures on the Winnipeg and Chicago markets - At one time he had a month worth supply of grain coming into England without anywhere to store and no one to sell the futures to - A futures contract is known as a derivative, and is called that because the price of the derivative is dependent on the price of something else, like grain for example - Options give a buyer the right to grain, but they don't commit you to actually taking control of possession of the good, such as grain - Call option refers to buying, and a put option refers to selling - If the price of the option increases you can sell it on the market, but if the price decreases you can just neglect the good the option represents - Basically on option gives you the right not to sell if you can't make money - Governments throughout history banned the selling of different kinds of derivatives, but they weren't very effective and had to be change constantly - Short selling is another form of selling something you don't actually own, except with shares - Profits are made by predicting the future prices of shares and then borrowing shares at the current price, selling them for less, and if the price goes down further, buying them on the market and giving them back to person you borrowed the original shares from (classic short) - A naked short involves a contract to sell shares at a later time for a specified price, no matter what actually happens to the price of the share Lecture 17 February 12, 2014 10:33 AM Risk - Investors make decisions on buying or selling shares based on whether the seller needs the money or the payout he can expect to receive in the future - A cap and trade system market is a market where a firm can buy a piece of paper that allows them to produce above the cap - Producers who can eliminate pollution cheaply will do so and sell some of their quota on the market - The reason corn ethanol RIN prices rose so dramatically because of a US government mandate, not investors manipulating the market - This mandate requires that a certain amount of ethanol be used in the production of gasoline - Ethanol producers in the United States were not able to produce enough ethanol, so gasoline producers were not able to include the required amount of ethanol - The government realized its mandate was unreasonable and the EPA reviewed the mandate - The decision hasn't been made yet so the price of the RIN is hovering around
More Less

Related notes for ECON 2720

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.