The economic function of futures markets /

This extremely provocative book, based on the author's Yale PhD dissertation, mounts a systematic attack on the conventional view that futures markets serve primarily to provide insurance against price fluctuations to handlers of commodities by transferring risk to speculators. Following the ideas of Holbrook Working, the author proposes that the primary purpose of futures markets is to serve as implicit loan markets, which are possible for all fungible commodities. The simultaneous double transaction of buying spot and selling a futures contract (a short hedge) is equivalent to borrowing the commodity; the vast bulk of futures transactions are in fact part of a combined operation with other positions. The author agues that risk aversion is neither necessary nor sufficient for hedging, which results rather from inflexibilities and nonlinearities in production and processing. The author considers the price insurance theory, the liquidity theory, and the information theory and finds each wanting. The esoteric terminology of futures markets unfortunately serves as a kind of code that must be broken to attain understanding. Most of the analysis refers to futures markets for agricultural commodities, and the recent explosion of financial futures is largely ignored. Nevertheless, this book is highly recommended as required reading for all those interested in unraveling the arcane mysteries of futures markets. Upper-division, graduate, and professional readership.-B.J. Moore, Wesleyan University