What's Wrong With That?

What's crooked about buying low and selling high? Isn't that how everybody makes their money? In the case of us working stiffs, what we are selling is our labor or our time, which cost us nothing to obtain. Our time is financially worthless to us unless we can find some profitable way to spend it. The boss's time is valuable because he can make more money doing boss stuff than he can punching out parts or whatever he hires us to do for him. Sure he makes more money than we do but, if it wasn't for him, we wouldn't be making any money at all. Well, that's not exactly true, we would probably be making money somewhere else, but not as much as we are making where we are, which is why we are where we are instead of somewhere else. Of course there are other considerations, but I'm just talking about economics here.

This reminds me of an old joke, stop me if you've heard this one: Two Polacks bought a bunch of Christmas trees in Cheboygan for ten dollars apiece, loaded them into a truck, took them down to Detroit, and sold them for ten dollars apiece. During the drive home, the one Polack said, "How come we didn't make any money on this trip?" The other Polack replied, "I think we need a bigger truck."

I didn't quite understand how that arbitrage thing worked but, after your explanation, I think I understand it better. If the price on the spot market is substantially lower than the price on the futures market, they buy on the spot market and immediately sell on the futures market, and vice versa. This would have the effect of bringing the two prices closer together  by re-balancing the supply and demand. You're probably right that they don't do it out of the goodness of their hearts, they do it to make money. It might be crooked if they conspired together with the intention of artificially manipulating the market, but they wouldn't necessarily have to do that to make it work. All they would need to do is to individually and independently see that there is an opportunity to turn a profit and act on it. Am I still missing something here?

Another thing I don't understand is the relationship between the real wheat being sold on the spot market and the fake wheat on paper being sold on the futures market. I could see it if a flour mill bought some wheat futures because they suspected that the price of wheat might be higher later on than it is now. If the price did indeed go up, they could then take delivery on their contract instead of paying the currently higher price on the spot market. But, from what I read on Wiki a few years ago, I don't think that's what happens. What happens is that the flour mill sells it's futures contract and uses the money to buy real wheat. As near as I can tell, the exchange buys back all the contracts just before the delivery date, so no real wheat changes hands as a result of the contracts. It's been awhile since I read this stuff so, if I have time this weekend, I'll re go look it up and see if I can make more sense of it now than I did then.

Have a good one.