| Futures markets are usually thought to be arcane and unrelated to other markets. In contrast, the theme of this dissertation is that a new concept, the need for accessibility, clarifies the function of futures markets and illuminates their close connections to many other markets.;This dissertation shows that the simultaneous purchase of a good on the spot and the sale of a futures contract, a transaction called a hedge, is actually the implicit purchase of accessibility. What is more, there are ways to purchase accessibility explicitly, such as in the nineteenth century practice of loaning warehouse receipts. This practice is examined in some detail, along with several other ways to trade accessibility: basis trading, straddles, the British system of contango and backwardation, and options.;The history of these many ways to trade accessibility is explored in some depth. It is surprising to find that futures markets were well developed in the 1840s--two decades earlier than usually thought--and that many of these other forms of trading were in use at the same time. The reasons futures emerged as the dominant form of trading reveal much about the nature of futures markets.;The concept of accessibility also proves useful in determining the optimal number of forward markets, another concern of this dissertation. It can explain why futures trading is concentrated in certain cities, grades and delivery months. More important, accessibility can explain why futures trading has developed in so few commodities.;This dissertation concentrates on the origins of futures markets in the nineteenth century. In early newspapers' market reports, the trade parlance is discovered to distinguish carefully between a good immediately accessible because it is "on the spot" and the same good "to arrive" or for "future delivery" at some uncertain time. Augmenting this historical evidence, a model based on inventory theory demonstrates firms will pay for secure access to raw material in order to reduce their costs of running short. It is shown that the spread between the spot and futures price does not reflect the supply of storage as Working proposed, but the demand for accessibility. Moreover, this spread is not a risk premium for avoiding fluctuations in price, as argued by Keynes and others. It is shown that if firms are concerned about the variability of their return to being in the produce trade, they will actually refrain from using futures markets. The risk of running short of raw material, not the risk of price fluctuations, motivates firms' use of futures markets.;In short, this dissertation draws heavily on nineteenth century terms and trading techniques for a new explanation of futures markets. The economic function of futures is to provide a market for accessibility. |
