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Monday, June 13, 2005

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.

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