How Futures and Derivatives Relate to Spot Prices and Inflation
Summary
The document considers whether futures and other commodity derivatives distort spot prices by letting speculators gain exposure without buying or taking delivery of the physical asset. It explains the basic risk-transfer role of a forward contract: a producer can lock in a future sale price, while a counterparty assumes the price risk in exchange for the possibility of a gain. The same rationale is offered for permitting derivatives, alongside a note that market controls are needed.
The response acknowledges that derivatives can affect spot prices and can be used for manipulation, while also noting that manipulation can occur without derivatives and is prohibited in many jurisdictions. It does not provide empirical evidence about the size or direction of price effects, nor does it assess specific allegations involving silver or exchange-traded funds. On inflation, it argues that futures and crypto trading are not drivers, and points instead to demand relative to supply, interest rates, and money supply. These are broad claims rather than a tested analysis of inflation transmission.
Key ideas
- Forward contracts let producers lock in future prices by transferring price risk to willing counterparties.
- Derivatives can influence spot prices and can be involved in market manipulation.
- Market manipulation can also occur without derivatives and is prohibited in many jurisdictions.
- The response attributes inflation mainly to demand and supply conditions, interest rates, and money supply.
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Full text
# Do futures trading and commodity trading distort the spot price in a negative way? # Do futures trading and commodity trading distort the spot price in a negative way? Futures and commodity trading are one of the main way (if not the main way) how spot prices get determined. But the sheer scale of futures and commodities market and their notional value is mind boggling and almost none of them lead to actual underlying being delivered. This makes me wonder, if there were no futures or commodity trades, wouldn't there be much more demand for the "real thing" and wouldn't it make the price much more volatile and much more higher than current price (as demand for the price appreciation or depreciation of that product is being fulfilled electronically rather than using the underlying asset). Speculators would be forced to participate in the trading of the underlying which would increase the demand of that underlying and shorting that underlying would be much more difficult which would create a positive price pressure compared to the current scenario. I hear about silver being a manipulated commodity where futures along with the SLV etf is being used to manipulate the underlying's price; some people even imply that futures and commodity trading have helped keep speculators invest their money in those assets thus reducing the overall inflation in the broader economy as their money chase may be S&P 500 futures instead of investing that money into the "real" economy. How accurate are these notions? Do futures and commodity trading really impact the underlying in a negative way? An extension to the question would be, do futures/cryptos etc really help keep a lid on inflation? ## Answer by ThatDataGuy (score 2) https://quant.stackexchange.com/a/69003 Firstly, a small nit. When you say 'commodities trading' in your question, I'm going to assume you mean forward or other derivative trading on the commodity. "Commoditity" trading in this example would more likely be associated with the type of thing being traded (eg, corn, metal, etc), as opposed to financial instruments / contracts. - Q: Can futures / forwards / other derivatives trading influence the spot price? and can that influence distort prices up and down, and in a "bad" way? - Q: Can derivatives like futures and forwards be used to manipulate the spot price? - Q: Are there ways to manipulate the price not using derviatives? - Q: Is market manipulation prohibited in most jurisdictions? A: Yes to all the above We can ask ourselves why forwards (and then futures & options etc) were invented. Mostly they were a way for producers (eg, corn farmers etc) to reduce their risk to prices in the future being a long way from where they are now. For example, if you know that you will probably be able to deliver 100 tons of corn in 6 months and you wish to lock in the price now, perhaps you strike a deal with a buyer for 100 tons of corn, in 6 months, at 10 USD per ton. Now if the price of corn goes down, it doesn't matter to you. That is a forward contract (which is similar, for the purposes of this answer, to a future). Who is on the other side of the contract? Someone who maybe believes that the price will go up. Via the contract, you have managed your risk, by transferring it to someone else, who wanted it. This is the fundamental utility of financial contracts, and without it people can get stuck with risk they don't want. This is why they are permitted, because not having them would be much worse for everyone. Of course, some market controls are required, but that's another can of worms entirely. As for inflation, I don't think the use of forwards / futures / crypto has any effect on inflation what so ever. Inflation is generally driven by a strong rise in demand relative to supply, low interest rates, or money supply.
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