We’ve discussed how prices are signals that convey information about goods — but can prices also convey information about events and even predict the future? For
We’ve discussed how prices are signals that convey information about goods — but can prices also convey information about events and even predict the future? For instance, can we predict Middle East politics based on the price of oil futures? Or predict the consequences of climate change based on the price of flood insurance in coastal cities? Of course, prices in these examples are imperfect predictors as there are many factors that influence the price.
We also take a look at some markets that have been designed to make predictions, like the Iowa Electronic Markets, and a specific example of how it was used to predict the outcome of the 2008 presidential election between John McCain and Barack Obama. What about the Hollywood Stock Exchange, where traders buy and sell shares and options in movies and music? What did the studio learn about its casting choices for the film, “50 Shades of Grey”? We discuss these examples and more in this video.
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Practice question: Andy enters in a futures contract allowing him to sell 5,000 troy ounces of gold at $1,000 per ounce in 36 months. After that time passes, the market price of gold is $950 per troy ounce. How much did Andy make or lose?
A. c. Andy made $250,000.
Since Andy is going to pay $50 more than market price, shouldn't he be losing $250K?