Stock Index Futures Prices Changes - Essay Example

Changing the stock index futures prices such that there is no profit from cash and carry arbitrage should never be implemented. Apart from that, there are no other factors that affect stock index futures prices. INTRODUCTION: It is a standard operating procedure for Investors to invest in projects, business venture or assets that that generate profits. Cash and carry arbitrage transactions can be described as paying for a commodity in the cash market with funds outsourced from borrowed money. Here, the investor in stocks would sell the corresponding futures contract at a price higher than the amount paid for in order to make a profit (Peel, and Taylor 2002. Arbitrage is also characterised as the simultaneous buying and selling of stocks in two separate financial markets with the intention of making profits generated by the difference between the buying and the selling prices of a commodity(Sackman, and Coltman 1996, 25). The carry cost can also be described as the interest expense paid by the investor to hold on to the commodity purchased in the futures market until the maturity date of the futures contract(Bjrk 2004, 1). Arbitrage will be further discussed below. BODY: Changing the stock index futures prices such that there is no profit from cash and carry arbitrage is ill -advised. Many investors prefer to funnel their scarce money resources into a cash and carry arbitrage contract. Their real goal would probably be to invest in two securities that are differently priced in the market. Later, the stock or futures prices of both commodities will correct themselves by either decreasing or increasing. This movement of prices would cause a profit on one commodity and a loss on the other commodity. Both these commodities will smoothen out resulting to the avoidance or decrease of probable future losses. The commodities where arbitrage can be used include sugar, gold, silver, coffee, oil, U.S. dollar currency, European dollar currency, Japanese Yen, French Franc, and other currencies (Scobie, Buckley, and Fox 1998, 8) In addition, the arbitrage investor may generate profits from investments if he or she invests in a security or in the futures contracts. The investor would then profit when the amount of the of the commodity plus the added cost of carrying is less than the projected commodities futures prices. One clear advantage of using arbitrage in the commodities futures market is that the investors can sell a commodity like the United States dollar today and then buy the same foreign currency four days after the currency purchase date. On the other hand, this is not possible in the real world. The real world transaction is characterised by a sales person turning over to the buyer the car, house, shirt, or computer game the moment when he or she pays for the items bought. Only when the sales price is higher than the investment price will the investor harvest the fruits from his or her arbitrage investment. In terms of the oil industry, "The oil industry, more than other energy sectors, is global in its character and operations. The geographical concentration of reserves and the vital role of oil in modern society has made it the principal commodity in international trade" (Haugland, Bergesen, and Roland 1998, 54) Evidently, the arbitrage investor may generate profits from investments if he or she invests in a security or in the futures contracts. Likewise, FRA influences prices. The currency exchange rate of the Eurodollar futures and American dollar Foreign Rate Agreements (FRA) high frequency data clearly indicates that the countless arbitrage opportunities are linked to the presence of stale FRA commodity prices as well as the oscillatory behavior of FRA quotes. And, Inter -market information flows are found to be of much shorter duration than previously reported with the futures market playing the dominant role in the information transmission process in the shorter -dated maturities. Many investors inject their money in short term interest rate futures and forward rate agreements to hedge short term interest rate exposures (Poskitt, 2008, 1). Surely, FRA influences prices. Further, Foreign Rate Agreements have been implemented by banks as an alternative tool to interest rate futures to manage interest rate risks. They have some qualities that are similar to interest rate futures. Interest rate futures are busily traded through the futures markets. On the other hand, the foreign rate agreements are transacted through the over the counter markets. The foreign rate agreements are characterised as having standard maturities. The foreign rate agreements do not require the payment of margins. These do not need market to market settlement payments. The foreign rate agreements are influenced by the three month London inter -financial intermediary (bank) offered rate. This term is also known by its shorter name LIBOR. The LIBOR is the same standard rate approved by the Eurodollar futures contracts. The LIBOR rate is the benchmark to determine if there was a success or failure in terms of investments in the foreign rate agreements (Poskitt, 2008, 1). Obviously, Foreign Rate Agreements have been implemented by banks as an alternative tool to interest rate futures to manage interest rate risks. Also, the foreign rate agreement offers and bids can be taken from the international news network Reuters. These bids and offers serve as one of the many basis for both the actual buyers and sellers of the foreign rate agreements to reach an amicable or equilibrium price. The secrecy of the foreign rate agreement agreements transpiring from reporting to the inter -bank foreign rate market continues to make it difficult to reach a conclusion that investments in the Eurodollar futures and the United States dollar foreign rate agreements market(Poskitt, 2008, 1). Further, "An important issue for exchange rate modelling is the relative importance of real versus nominal shocks in accounting for movements in real and nominal exchange rates. Disequilibrium models of exchange rate determination assume that prices in goods markets adjust sluggishly to shocks and that variation in real and nominal exchange rates is due primarily to nominal shocks..."(Fisher 1996). Unquestionably, the foreign rate agreement offers and bids can be taken from the international news network Reuters. Plus, the Bank of International Settlements generated survey results that can be used for deciding whether it is profitable to invest in the foreign rate agreements. The same establishment emphasized that the average turnover in United States dollar foreign rate agreements for the month of April 2001 alone had already catapulted to $39 billion. On the other hand, the CME reports indicated that the average daily turnover in the Eurodollar futures had been higher than the foreign rate agreements at $759.6 billion. This proves that the investing in the Eurodollar is a better alternative to holding onto the declining American dollar(Poskitt, 2008, 1). Definitely, the Bank of International Settlements generated survey results that can be used for deciding whether it is profitable to invest in the foreign rate agreements. In addition, changing the commodity futures index futures prices in order to create a situation where there is no profit from cash and carry arbitrage would surely hedging an unprofitable undertaking. Hedging can be defined as an investment that is taken out to decrease the probable future losses from another investment. A hedger normally invests in a security that seems to be price lower in relation to the fair market value of another assets. In the commodities market, another clear example of advantages of hedging is when an investor profits from short selling(Cooke 2007). Short selling is described as the scene where the seller of the commodity does not own the stocks he or she sells. He buys the commodity after he has sold the commodity. Truly, changing the commodity futures index futures prices in order to create a situation where there is no profit from cash and carry arbitrage would surely hedging an unprofitable undertaking (Poskitt, 2008, 1). Further, some commodities and stock market investors enter into arbitrage to play a gambling game. Many adventurous and high risk taking investors would invests in the commodities futures and the stock market with the hope of earning profits. The elimination of the profit function of the commodities market will create a big probability that would surely drive away the profit -seeking investors from investing in the United States dollar, the European Union dollar, the sugar commodity, the gold commodity, the oil commodity, or even the coffee commodity. And, some people would invest in the commodities market to effect actual delivery of gold, oil, United States dollar, European dollar, Coffee. Yes, the investors could take advantage of the commodities market because they only have to pay a small percentage of the entire price of the price of coffee (Maizels, Bacon, and Mavrotas 1997, 85). Correctly, some commodities and stock market investors enter into arbitrage to play a gambling game. Apart from that, there are no other factors that affect stock index futures prices. Maslow emphasised that man's three basic needs are food, clothing and shelter. Man must eat three full meals a day to survive. A person must also buy a shirt to protect his or her body from the freezing snow outside during the snow months. A person also must buy clothes to protect himself or herself from the harmful rays of the sun during summer time. A person needs clothes to protect himself or herself from the harmful elements of nature (Combs 1999, 1). Surely, Maslow emphasised that man's three basic needs are food, clothing and shelter. Plus, a man or a woman needs a house to keep him or her protected from the dangers of hurricanes, tornadoes and the like. A person can move on to fill his or her other higher needs after filling these three basic human needs. These other Maslow needs include the self -actualization. Another such higher Maslow need is buying a yacht. Another higher need is for a man or woman to love and be loved in return (Maslow 2000, 3). Maslow theorised that " developing his hierarchy of needs, maintained that after survival and security, affiliation is the first psychological need of the human being, and which Miller (1976) defined as the need for community as expressed in connectedness, relatedness, interdependence, and belonging"(Coy, and Kovacs-Long 2005). Certainly, a man or a woman needs a house to keep him or her protected from the dangers of hurricanes, tornadoes and the like. Further, economic theory is another factor in arbitrage transactions. Fundamental economic theory states that the commodity prices of foreign currencies and other commodities are influenced by the gross domestic product and other economic indicators of each country. Also, some European Union member states' business organisations would not find as profitable to sell their goods to the United States market because the foreign exchange rate of the United States currency has decreased compared with the Asian currencies and the European dollar(Barrell, and Holland 2008). This has resulted to the continued decline in the profits of the European Union member states to sell their goods in the United States. Currently, many companies do not want to hold onto the American currency for fear that the value of the American currency will continues in a downward slide (Lai, and Yu 2003, 53). On the other hand, the United Kingdom economy can be described as "The economy recorded strong growth in the second half of last year, expanding by 0.8 and 0.9 per cent in the third and fourth quarters, supported by the strength of domestic demand. Preliminary estimates show an expansion of GDP of 0.6 per cent in the first quarter."(Kirby, Metz, Riley, and Weale 2004). Obviously, economic theory is another factor in arbitrage transactions And, another important criteria that affects stock index futures prices is the supply and the demand theory implemented on the stock market or the commodities market. The economic demand theory indicates states that the number of units sold in the commodities futures market will go up if the prices of the commodities offered for sale to the general public or other ways decreases. On the other side of the fence, there will be a clear decrease in the number of inquirers of commodity units sold. There is a clear decline in the commodities market. In terms of the economic supply theory, the seller of goods and services will increase the number of units they will produce and sell at the price of the commodity increases instead of decreasing(Ross 2004, 49). Evidently, another important criteria that affects stock index futures prices is the supply and the demand theory implemented on the stock market or the commodities market. In addition, market prices affect arbitrage transactions. For, "normal market conditions falling prices would be expected to result, at least in the medium term, in a decline in output, and not an increase. This points to the influence of one or more new elements in the commodity markets which were not operative before the mid-1980s, and which resulted in expansion in the volume of commodity exports from a wide range of developing countries" (Maizels, Bacon, and Mavrotas 1997, 10). The United Kingdom housing sector can be described as "But under competitive market conditions, the lot of disadvantaged people is aggravated by such factors as heat poverty (poor insulation leading to excessive fuel bills, high cost or dangerous forms of heating, cooking and lighting, need for supplementary heating or cooling), unsafe dwellings.(Clark 2001)". Here, the housing prices are influenced by the capacity of the buyer to pay. Clearly, market prices affect arbitrage transactions. CONCLUSION: It is a standard operating procedure for Investors to invest in projects, business venture or assets that that generate profits. Cash and carry arbitrage transactions can be described as paying for a commodity in the cash market with funds outsourced from borrowed money. Evidently, the arbitrage investor may generate profits from investments if he or she invests in a security or in the futures contracts.Surely, FRA influences prices. Obviously, Foreign Rate Agreements have been implemented by banks as an alternative tool to interest rate futures to manage interest rate risks. Unquestionably, the foreign rate agreement offers and bids can be taken from the international news network Reuters. Definitely, the Bank of International Settlements generated survey results that can be used for deciding whether it is profitable to invest in the foreign rate agreements. Truly, changing the commodity futures index futures prices in order to create a situation where there is no profit from cash and carry arbitrage would surely hedging an unprofitable undertaking. Correctly, some commodities and stock market investors enter into arbitrage to play a gambling game. Apart from that, there are no other factors that affect stock index futures prices. Surely, Maslow emphasised that man's three basic needs are food, clothing and shelter. Certainly, a man or a woman needs a house to keep him or her protected from the dangers of hurricanes, tornadoes and the like. Obviously, economic theory is another factor in arbitrage transactions. Evidently, another important criteria that affects stock index futures prices is the supply and the demand theory implemented on the stock market or the commodities market. Clearly, market prices affect arbitrage transactions. Works Cited Barrell, Ray, and Dawn Holland. 2008. Risk and the UK Exchange Rate. National Institute Economic Review , no. 203: 54+. Bjrk, Tomas. 2004. Arbitrage Theory in Continuous Time. Oxford, England: Oxford University Press. . Cooke, Phil. 2007. Social Capital, Embeddedness, and Market Interactions: An Analysis of Firm Performance in UK Regions. Review of Social Economy 65, no. 1: 79+. Clark, M. 2001. Domestic Futures and Sustainable Residential Development. Futures 33, no. 10: 817+. Combs, Arthur W. 1999. Being and Becoming: A Field Approach to Psychology. 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Hong Kong: Hong Kong University Press. Maizels, Alfred, Robert Bacon, and George Mavrotas. 1997. Commodity Supply Management by Producing Countries: A Case-Study of the Tropical Beverage Crops. Oxford: Oxford University. Maslow, Abraham H. 2000. The Maslow Business Reader. Ed. Deborah C. Stephens. New York: Wiley. Peel, David A., and Mark P. Taylor. 2002. Covered Interest Rate Arbitrage in the Interwar Period and the Keynes-Einzig Conjecture. Journal of Money, Credit & Banking 34, no. 1: 51+. Power, Michael. 1997. The Audit Society: Rituals of Verification. Oxford: Oxford University Press. Rentokil Tries to Kill off Concern about Its Sharp Slide in Profits. 2007. Western Mail (Cardiff, Wales), August 24, 31. Ross, Priscilla. 2004. Precious Prices: Supply/demand and Dollar Prospects Will Affect Gold, PPG and Base Metal Prices through 2005, Writes Priscilla Ross from a Recent Seminar on the Subject. China's Purchases Will Be a Key Factor. 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