Futures/Exp. Spot Rates

[travelin.man119]

Can someone clear up when futures are biased/unbiased predictors of future spot rates?
I read the material as saying during times of normal backwardation futures are biased predictors, but I also read when investors are hedging futures are unbiased predictors. My understanding was hedging was associated with backwardation and speculation was associated with contango.
Any help would be greatly appreciated…thanks

 

[Harrogath]

travelin.man119 wrote:
Can someone clear up when futures are biased/unbiased predictors of future spot rates?
I read the material as saying during times of normal backwardation futures are biased predictors, but I also read when investors are hedging futures are unbiased predictors. My understanding was hedging was associated with backwardation and speculation was associated with contango.
Any help would be greatly appreciated…thanks

When I want to buy something in the future and hedge my risk from a rise of prices, is it backwardation?
If I do a short sale (I am speculating the price will drop in the near future), is it contango?
Be careful with that conclusion of yours.

 

[S2000magician]

travelin.man119 wrote:Can someone clear up when futures are biased/unbiased predictors of future spot rates?
I read the material as saying during times of normal backwardation futures are biased predictors, but I also read when investors are hedging futures are unbiased predictors.

The definition of normal backwardation is that the futures price is lower than the expected spot price. So, by definition, in normal backwardation, the futures price is a biased predictor of the expected spot price.
The definition of normal contango is that the futures price is higher than the expected spot price. So, by definition, in normal contango, the futures price is a biased predictor of the expected spot price.
Normal backwardation has nothing to do with backwardation: they’re two different ideas.
Normal contango has nothing to do with contango: they’re two different ideas.

travelin.man119 wrote:My understanding was hedging was associated with backwardation and speculation was associated with contango.

Your understanding is incorrect.
Hedging has to do with removing an existing risk; speculation has to do with taking on an unnecessary risk with the goal of profiting. They both occur in markets in backwardation, and they both occur in markets in contango. In fact, in general, in a single transaction you have a hedger and a speculator: the hedger has a risk he wants to remove, so he gives it to the speculator. (Occasionally you have two speculators in a transaction; they have opposite views of what will happen in the future. Occasionally you have two hedgers in a transaction: they have equal but opposite risks that they want to hedge.)