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Gold/Mining/Energy : Big Dog's Boom Boom Room
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To: rayok who wrote (71692)9/22/2006 3:15:44 PM
From: CapitalistHogg™  Read Replies (2) of 206209
 
Futures are a zero sum game

That made me giggle and it is totally untrue.

Maybe when Black and Scholes were deriving their option theory it is a zero sum game, but in reality it is not. Ever hear of naked selling? The Reg SHO list? It is NOT a zero sum game.

EDIT: You are right though in theory only.

The equation given by Black-Scholes, in my opinion is the foundation for how money is created and held with liquidity in the marketplace. It can easily be explained in non-mathematical terms. Imagine a portfolio containing the option, plus a short bond, delta hedging stock position, plus cash as to initially have a total value of zero. Then a (change in the value of the option) + (Expected profit on the Delta-hedged option position due to continuous random moves in stock price) +(Interest received on the cash) = Zero

If the option is hedged correctly it shouldn’t make any profit above the risk-free interest rate.

In order to get money into (out of) the marketplace and held with sufficient liquidity a game has to be played of selling the future (bonds) and buying the spot (stocks). A model of arbitrage is devised, it allows for random events to be sufficiently absorbed so a liquidity crash does not happen within a statistical deviation. A self financing, replicating hedging strategy that fulfills these conditions, is all one really needs in order to understand the value of any commodity; stocks bonds etc, and hence what makes a dollar a dollar.
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