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Comment by nindalf | Hacker News Reader

> I have not seen any necessary gambling in my years in manufacturing.

You need to manufacture a widget and it must cost no more than $5. You have a few inputs to your widget, some made with steel and some with plastic. If steel and plastic prices increase, your inputs cost more than $5 and you’re making a loss on every widget you sell.

So you go to the futures market and take a bet that the input prices will increase. If you’re right, you win $, which makes your widget manufacturing profitable and you’re still in business. If prices fall you lose the bet, your profits are lower. But hey, at least you’re still in business.

A responsible, well run manufacturing business benefits from the existence of such a market because it allows them to de-risk.

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In this example, the use of futures contracts isn't really gambling. Quite the opposite: it's insurance!

> it's insurance

What’s the person on the other side of the trade up to?

This debate reminds me of the lead up to the Onion Futures Act, where moral outrage over speculation led to a ban and subsequent lack of insurance (and higher price volatility) for onion farmers. To the point that the son of the farmer who first lobbied for the ban returned to Congress to ask for its repeal.

[1] https://en.m.wikipedia.org/wiki/Onion_Futures_Act

> "What’s the person on the other side of the trade up to?"

The same thing: hedging/insuring against price changes. The supplier (ultimately, a farmer, steel mill, gold miner, electricity generator, etc) is getting a guaranteed price for the commodity they're selling, reducing risk.

Virtually no hedging happens between natural buyers and sellers precisely because they approach the market at different times, and don’t have the in-house pricing expertise to discern good and bad bids and offers ex ante. This is why, absent financial participants, the natural participants get hosed. (And why they use financial markets versus direct purchases and sales.)

Again, these aren’t theoretical considerations, we’ve always had naïve Puritanical elements seeking to ban speculation, and in some assets and jurisdictions they have succeeded. Reducing market participation has never worked.

You can try to play word games all you want but they are faulty in a very transparent way. No one is falling for it.

Faulty how?

I’d assume that hedging buy prices or long term buy contracts are not the same as gambling.

> So you go to the futures market and take a bet that the input prices will increase. If you’re right, you win $, which makes your widget manufacturing profitable and you’re still in business.

This isn't remotely how manufacturing works. Manufacturers are focused on making the widget, for them the most important thing is that material is available, not a paper contract.

Futures offer physical delivery. At least try to understand how the market works before you claim it’s pointless.

Yes, but finance bros are not buying it for physical delivery. We are talking about speculation here after all.

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