Contango, Anyone?
James Hamilton is a very well respected economics professor at the University of California-San Diego. He wrote a classic econometrics text on Time-Series Analysis (IMHO one of the best on the topic ever done). Now it turns out that he also has a blog, titled Econbrowser.
He's got lots of interesting stuff there, but this post, explains one of the most important questions of futures markets: what is the relationship between the current price of a commodity (like oil, for example), the expected future price of that commodity, and the current price of a futures contract on the commodity?
It's well-suited for a class in derivatives before you dive into the math of the relationship: easily understood and explained in a low tech way, relatively math-free fashion. In addition, it touches on a number of critical concepts: interest and storage costs, cost of carry, convenience yield, backwardation, and contango.
Highly recommended.
He's got lots of interesting stuff there, but this post, explains one of the most important questions of futures markets: what is the relationship between the current price of a commodity (like oil, for example), the expected future price of that commodity, and the current price of a futures contract on the commodity?
It's well-suited for a class in derivatives before you dive into the math of the relationship: easily understood and explained in a low tech way, relatively math-free fashion. In addition, it touches on a number of critical concepts: interest and storage costs, cost of carry, convenience yield, backwardation, and contango.
Highly recommended.
posted by The Unknown Professor at 9:09 PM
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