Errera & Brown - Chapter 3
Key Points of Emphasis:
- Futures markets are very efficient due to a highly competitive environment.
- Financial commodity prices approximate the true value of the underlying commodity.
- Parallelism recognizes the fact that both financial and physical markets are influenced by similar things.
- Convergence is the tendency for the financial contract to approach the value of the physical commodity as it approaches settlement.
- Speculative Traders use both fundamental and technical analysis in making buy/sell decisions.
- Arbitrage is the act of taking advantage of price differences.
- Basis represents the difference in price between financial and physical markets. Locational Basis is the value between the financial commodity contract delivery point and other cash points.