Price discovery

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Price discovery is the process of establishing a market price at which demand and supply for an item are matched.[1]

On any given day the price of a July futures contract will reflect the consensus of buyers’ and sellers’ current opinions about what the value of the commodity will be when the contract expires in July. As new or more accurate information becomes available or as expectations change, the July futures price may increase or decrease.

Competitive price discovery is considered to be an important economic function and a major benefit of futures trading. Through this competition all available information about the future value of a commodity is continuously translated into the language of price, providing a barometer of supply and demand.

Some contend that the main purpose of markets is to allow people to determine prices, and without trades in an open market there can be no accurate determination of value.[2] The price observed at an instant in time on the ideal efficient market is viewed as good assessment of future risk and return.[3]


Resources

"The Dynamics Of Price Discovery," Bingcheng Yan and Eric Zivot, Department of Economics University of Washington, March 15, 2004

References

  1. Glossary Of Statistical Terms. Organisation for Economic Co-operation and Development.
  2. G7 Undermines Price Discovery. National Post.
  3. The Price Discovery Mechanism. Mayin.org.