149In the future when all’s well
mufn. ‘I guess you want to know the difference between a
future and a forward.’
‘Yes please.’
Markets and counters
Futures are standardised contracts which trade on an exchange.
Forwards are tailored deals between two parties.’
‘Meaning. . . ?’
‘The exchange acts as a middleman between the buyer and seller
of a future. Exchange traded contracts are
highly standardised. Standardised contracts
are much more liquid than tailored deals. A
liquid investment is one which can be traded
quickly and easily. The market brings a large
number of buyers and sellers together. It’s
easy to discover the price of a future because
it’s publicly quoted. Futures contracts have
easily understood quantities (twenty tonnes of pork bellies), and
set dates for delivery of the underlying asset (the last day of each
‘What’s a forward?’
‘A forward is an over-the-counter (OTC) agreement. It’s normally
one nancial institution dealing directly with another. OTC
agreements are largely unregulated because the players are
highly sophisticated investors. It’s very hard to get a price for
OTC derivatives because they’re private and, therefore, not
visible. A forward contract is good for an irregular amount (the
local currency equivalent of $107.341 million) of a less popular
underlying asset (Ukrainian karbovanets) on a specied date (24
‘Is there another reason why someone would choose a forward
rather a future?’
‘Yes. It’s a very good way to keep things secret.’
A liquid
investment is
one which can be
traded quickly and
You can always get what you want150
Of course, realised Anisa. Of course. She had to get out of this
meeting and get on the phone as soon as she possibly could. But
she still needed to nd out about the third type of derivative.
‘What about swaps?’
‘What about lunch? I’m getting a bit peckish.’
‘One thing more and I’ll let you go. What does it mean when
someone has cornered the market?’
‘It’s a peculiar term. We apply it to any attempt to manipulate the
price of an investment by buying a huge market share. It used to
mean that a single merchant had grown big enough to control a
marketplace. It could have been beef in Buenos Aires, saffron in
Mumbai or whale blubber in Nuuk. The merchant’s stalls were so
big and so numerous they occupied more than one side of the
market. As the closest thing to a monopoly, the merchant had
the power to set prices.
‘Using futures, a potential cornerer only needs to nd the margin
rather than the full price of the commodity. This strategy requires
much less capital than buying the physical commodity and
there’s no need to store the goods.’
Five attempts to corner the market
Cornering the market is never a risk-free proposition. Attempts to
corner a commodity have rarely met with unqualified success. Here
are five examples of corners that went spectacularly wrong.
The Hunt Brothers – Nelson Bunker and William Herbert
These two held control over half of the annual silver production.
They rubbed their hands with glee as silver rose from $6 an ounce
to nearly $49. The brothers had used derivatives to gain their
exposure, and had also borrowed heavily to increase their leverage.
When the brothers found themselves unable to pay the interest,
the market was spooked and silver prices plummeted.
case study

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