Schweser 's, Page No. 55, Question Number 10. Can someone please explain this?
Liz Potter is analysing futures markets in the nation of Subervia for the first time. Shehas noted various historical time periods with a hight volume of notmal backwardation trading, and other periods of time with a high volume of normal contango trading. Currently, most of the trading volume evidences normal contango pricing. Futures prices in Subervia are most likely:
A. biased predictors of expected spot rates.
B. unbiased predictors of expected spot rates.
C. lower than expected spot rates.
I dont get the explanation to the answer. Please help me out on this one.
Answer seems A.
Other options,
C - directly omitted, as in Contango FP> Exp S P.
B - If you look at the wording in Schweser my friend, it says when both parties Hedge the risk ( going in opposite position), future price that might be trading above or below exp future S P at that time, will converge to future S P and that’s why it is called Unbiased predictor of Future S P. (which happens rarely or in theory).
So, unbiased predictor = something has similar value, we’re trying to predict.
biased = price of something that we can’t predict.
In the above question, it is hard to predict the future spot prices which is biased.
I may not be as good as others in explaining, but hope it helps.
Thanks
Not quite.
You’re describing _ normal _ contango.
In contango, futures price > today’s spot price, not expected spot price.
A predictor is unbiased if its expected value is the value it’s trying to predict. For example, a sample mean is an unbiased predictor of the population mean.
A predictor is biased if its expected value is not the value it’s trying to predict. For example, if in a sample variance we divided by n instead of dividing by (n − 1), the predictor would be biased. (Indeed, the proper name for the sample variance in which we divide by (n − 1) is the _ bias-adjusted _ sample variance.
In normal contango and normal backwardation, forward prices are biased predictors of future spot rates: that’s inherent in the definition of normal contango and normal backwardation.
True Sir. It was my typo. Thanks for correcting me.
Small things make perfection, but perfection isn’t a small things
My pleasure.
We all make mistakes; we don’t want those mistakes to mislead other candidates.
What reading is this? I’ve been meaning to check this concept for a while but Bookshelf search sucks.