You don’t agree to “buy it today”, you “agree to buy” it today. Both exchange of payments and assets take place in the future
The price of a future isn’t determined by prediction any more than the asset is. The price of a future is given explicitly by the price of the underlying, suitably adjusted for cost of carry and cost of financing
The price of a future is given explicitly by the price of the underlying, suitably adjusted for cost of carry and cost of financing
First, that’s not true, technically speaking. The price of the future is whatever the market clears at. Arbitrage is a strong force that keeps the future and the underlying prices in a certain relationship, true, but only under certain (though common) conditions.
Second, here we are talking about NGDP futures and with them specifically there is no arbitrage against the underlying because the underlying is just an economic number that you cannot buy and warehouse. So in this particular case the price of the future is purely prediction-based.
A couple of points:
You don’t agree to “buy it today”, you “agree to buy” it today. Both exchange of payments and assets take place in the future
The price of a future isn’t determined by prediction any more than the asset is. The price of a future is given explicitly by the price of the underlying, suitably adjusted for cost of carry and cost of financing
First, that’s not true, technically speaking. The price of the future is whatever the market clears at. Arbitrage is a strong force that keeps the future and the underlying prices in a certain relationship, true, but only under certain (though common) conditions.
Second, here we are talking about NGDP futures and with them specifically there is no arbitrage against the underlying because the underlying is just an economic number that you cannot buy and warehouse. So in this particular case the price of the future is purely prediction-based.