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Essay on Financial Oil Features
The financial futures revolution began, like most great ideas, with a single concept: to give business and financial managers the same risk transfer opportunities that their agribusiness counterparts had been using successfully for more than 100 years. Like most great ideas, however, its merit was not immediately and universally recognized. The history of the International Monetary Market and the start of financial futures trading is as much a story of persistence, determination and conviction as it is one of brilliance, insight or inevitability. To borrow from Thomas Edison, the birth of the IMM was the result of both perspiration and inspiration (Box, Jenkins, 1986).
To fully comprehend the revolutionary impact of the International Monetary Market on the history of futures markets, one must first understand that, from its inception, the IMM represented both a specific and general departure from traditional futures. Although the IMM began life with foreign currency contracts—itself a revolutionary departure from the theretofore agricultural base for futures—it represented a much broader concept (Brandt, Bessler, 1991).
Many studies on futures market efficiency utilised Fama’s concept developed in 1970. According to Fama, an efficient market generates price, which at any point in time always reflect all available information. Thus at any point in time, t, an actual price will emerge that reflects current information on supply and demand. Simultaneously, current expectation concerning future levels of supply and demand will be fed into the today’s futures price of a contract maturing in time t + j. The market is efficient if futures prices exhibit two separate though related characteristics. In a perfect market, futures price will behave as a martingale model. Second, futures prices will provide the best available estimates of the subsequent actual prices (or matured futures prices).
Until the 1970s, the price of oil was relatively stable with production largely controlled by the biggest oil companies..........
