How are vegetables in a vegetable market priced? Or Grains in a village market?
Or how do you sell a video game to that friend of yours?
Yes, by the forces of Demand and Supply.
Now, that would be very simple. Of course, with the evolution of banking system and the prevalent use of Rate fixing and all, things are not that straight and simple.
Say you want to buy a forward, which is an over the counter product. Say, the Forward is for Oil Rate. Now, the rate futures rate for the same is say, 1$ per lot, whatever be the lot size. And this comes with Exchange insurance and all.
Say you are betting that the barrel rate will go higher from what it is presently. However, the whole world thinks that it will go down, essentially making your bet more riskier. Now, since the other guy from whom you are buying the forward (The bet that rates will go down)thinks the opposite of what you are thinking, he will readily sell you those forwards, at a price more agreeable to you
than him. So, you might have to pay less than what the exchange rate is for the same product! Say, 80 Cents!
And now, consider the opposite situation. You want to buy essentially what all others are buying, meaning it's supply is way less than what the demand is. So, the person having the products (or the Bets) will not be willing to part with it easily.And hence you would have to pay more for it! Say $1.20.
So, it all comes down to what the majority thinks and how the predicted movement is! Various rates are fixed by the govt. to regulate
these, but the major force is the Demand-Supply one.
PS: There are other ways to get this, but this I found the simplest!
Or how do you sell a video game to that friend of yours?
Yes, by the forces of Demand and Supply.
Now, that would be very simple. Of course, with the evolution of banking system and the prevalent use of Rate fixing and all, things are not that straight and simple.
Say you want to buy a forward, which is an over the counter product. Say, the Forward is for Oil Rate. Now, the rate futures rate for the same is say, 1$ per lot, whatever be the lot size. And this comes with Exchange insurance and all.
Say you are betting that the barrel rate will go higher from what it is presently. However, the whole world thinks that it will go down, essentially making your bet more riskier. Now, since the other guy from whom you are buying the forward (The bet that rates will go down)thinks the opposite of what you are thinking, he will readily sell you those forwards, at a price more agreeable to you
than him. So, you might have to pay less than what the exchange rate is for the same product! Say, 80 Cents!
And now, consider the opposite situation. You want to buy essentially what all others are buying, meaning it's supply is way less than what the demand is. So, the person having the products (or the Bets) will not be willing to part with it easily.And hence you would have to pay more for it! Say $1.20.
So, it all comes down to what the majority thinks and how the predicted movement is! Various rates are fixed by the govt. to regulate
these, but the major force is the Demand-Supply one.
PS: There are other ways to get this, but this I found the simplest!
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