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Technology Stocks : DELL Bear Thread -- Ignore unavailable to you. Want to Upgrade?

To: lin luo who wrote (1803)	9/2/1998 11:37:00 PM
From: Bilow	Read Replies (1) \| Respond to of 2578

Hi lin luo; I'm struggling with trying to figure out what China did with the futures market. Please assist me one more time, if I still don't get it, I will give up gracefully... So when the China buys the underlyings and sells the future, they force the arbitrage apart. Since the futures price is based on short term debt rates as well as the underlying stocks, this must, I suppose, cause short term interest rates to change. I'm a little sleepy here, but here goes. The usual arbitrage between interest rates, futures and stock prices is to have enough money to buy the stocks. That is what you must pay interest on, as the futures don't need nearly as much margin. Then you sell the futures. Since all the margin money costs you interest, it is normal for futures prices to be higher than the underlying security price. This difference, (which I have seen on all long term stock futures prices) is what allows the index arbitraguers to earn interest on their money... Of course there also exists the reverse arbitrage. That is, short the stocks and long the futures. Arbitrageurs would execute that program if the futures dropped a lot more than the stock market. So if the government drives the future below the underlying security price, this would mean that arbitrageurs would have to reverse their positions. They would then earn interest by shorting the stock and buying the future... If they previously had a position that consisted of long stock and short the future, the government's action would force them to reverse, costing them a lot of money... But is this who the government is trying to punish? I'm still not getting it. I thought the speculators to punish were the people who were short the HK$, and those short the HK stock futures. It seems like those who were short the stock futures that the government bought would get a free gift, as the futures price would be artificially lowered. The guys who were short the HK$ don't seem to me to be punished by all this, at least directly. But the influence of doing this sort of action on interest rates is too much for me to work out. Please explain a little more... Thanking you in advance, and goodnight. -- Carl