The Devil's Deal

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

quarter).

‘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

October).’

‘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

easily

’’

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