27. Options, Futures and Other Derivatives Ch5: Forward and Futures Prices Pt2

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Mark Meldrum

Mark Meldrum

Күн бұрын

Пікірлер: 46
@budi4uk110
@budi4uk110 5 жыл бұрын
Dear prof. Mark, I'm a bit confused about the case of F0 < S0 at 9:20, on which we sell S0 and buy F0, how do we invest and earn interest from proceed of selling S0, if all the money is immediately used to buy F0 at $39? Thanks before
@MarkMeldrum
@MarkMeldrum 5 жыл бұрын
Forwards cost nothing to enter. They are free. They are just contracts to buy or sell something at a future date.
@budi4uk110
@budi4uk110 5 жыл бұрын
Ah i see, many thanks!
@mukuldeka2548
@mukuldeka2548 5 жыл бұрын
@@MarkMeldrum Follow up question Mark, We Sell S0 but to sell S0 we first need to have the asset, even though we enter into a forward contract aren't we suppose to deliver the asset immediately if we dealing in spot market, where we selling at S0?
@anastasiosdemertzis107
@anastasiosdemertzis107 4 жыл бұрын
@@mukuldeka2548 When you short you don't have the asset your borrow the asset. Since the value of a forward is 0 at t=0 why are you saying that we have to deliver the asset immediately? Our value is 0. Forwards are an obligation to buy or sell an asset at a pre-specified price at a pre-specified date. What would be the difference between a spot transaction and a forwards transaction if we had to deliver the asset immediately?
@user-cq1hz7pi2d
@user-cq1hz7pi2d 5 жыл бұрын
so if f0 > the s0 i will borrow the money, buy s0 for 40 then sell @ the f0 price for 43 and the repay my 40.50 debt but if f0< the s0 then I will borrow the asset sell it for 40@ the spot price, invest the money to earn 40.50 at the end of the period, and then use the money and buy it back @ 39??
@MarkMeldrum
@MarkMeldrum 5 жыл бұрын
If Fo < 0, buy low, sell high. Buy the forward, short sell the asset, invest the funds, take delivery at time T, cover the short position.
@rohitdutta3272
@rohitdutta3272 4 жыл бұрын
Sir please can you elaborate on this like the second part of of forward is less than spot
@HoangNguyen-yb9ki
@HoangNguyen-yb9ki 3 жыл бұрын
Short (instead of Sell) S0 would provide more suitable meaning. Just jotted down sth to prepare for my own exam. Thank you Professor Meldrum. Great serie.
@malavgandhi2964
@malavgandhi2964 3 жыл бұрын
I’m sorry but I am very confused here. If we think that the asset is mispriced and is bound to go up then do we really need to short the futures contract ? Why can’t we just buy the asset, sell at a later date and keep the profits?
@Mengadmire
@Mengadmire 3 жыл бұрын
Im missing something, i thought there is no cost to to enter a futures contract, hats the different between futures and options right? suddenly we price the futures contract
@josephlucarelli2820
@josephlucarelli2820 8 жыл бұрын
First of all congratulations for your videos. My question is: theoretically would be possible have two arbitrage arguments that lead to two different asset prices that are not compatible with one another? For example, would be possible to have an arbitrage argument that leads to the conclusion that a forward price on an investment asset must be lower than the current spot price? I'm not saying that this is the case of the futures, I'm talking in general, of any asset. In this case it would not be possible to reach any equilibrium and an arbitrage opportunity would always exist. Is it something possible in theory?
@MarkMeldrum
@MarkMeldrum 8 жыл бұрын
It does happen, but only when there is some clear market inefficiency. It also happens in physical assets when either transportation costs would be too high or when the asset has a price that is so high it eliminates most buyers. But in a well functioning financial market with low transaction costs and banks that can lend and borrow at LIBOR - not so much and not for long.
@josephlucarelli2820
@josephlucarelli2820 8 жыл бұрын
Thank you for your reply. My doubt is about efficient markets. For example we know that the forward price on an investment asset, given some assumptions, must be equal to S*exp(r*T), and if, for example, the forward price is higher we know that there is an arbitrage opportunity: a trader can short the forward and buy spot the underlying asset to deliver it at maturity. My doubt is the following: is it possible that in an efficient market (with the same assumptions as before) two trading strategies lead to two asset prices that are not compatible with one another? Is there something that prevent arbitrage opportunity when the price is equal to S*exp(r*T)? Or theoretically, even in an efficient market, there might be a chance to find a trading strategy that is not compatible with this equilibrium price?
@josephlucarelli2820
@josephlucarelli2820 8 жыл бұрын
I'm talking in general, of any asset, not just of the forward price in particular. For example other limits determined by no-arbitrage assumptions are the upper and lower limits for call and put European options. Is it possible to prove that there cannot exist other no-arbitrage arguments that might lead for example to an upper bound lower than the previously determined lower bound? Is there something that prevents this from happening?
@Lgeezie1995
@Lgeezie1995 8 жыл бұрын
You said that continuously compounded, or the cost of carry on an investment asset, is always greater than 0. Do you mean always greater than 1? Also, isn't it true that the futures price is always greater than the spot price (of an investment asset) only if the risk free rate is positive? What about when Eurozone countries and even the BOJ make the overnight rate negative, wouldn't the future price of the spot be less than the spot since you have to pay the bank to hold your money?
@MarkMeldrum
@MarkMeldrum 8 жыл бұрын
First question. Yes, that was a misprint. It has been corrected with an annotation, but if you are using a mobile device, annotations don't work so you won't see it. Second question. The risk-free rate used in derivative pricing is typically Libor or some other Interbank rate. That is the rate AA rated banks will deal with each other for unsecured loans (so not exactly risk-free). I have never heard of a time when such a rate went negative. We have to distinguish between a central bank rate that is targeted by policy, a government T-Bill rate that is set by market forces, and an Interbank rate. We typically never use a central bank policy rate. We will always use some market rate, either a T-Bill rate (although rarely) or Libor. Since arbitrage is carried out almost exclusively by very large financial institutions, and Libor is the rate they can borrow and lend at, it makes sense to use Libor for futures pricing.
@gargisingh4502
@gargisingh4502 4 жыл бұрын
Hello Professor Mark, I had one question: If Fo
@anastasiosdemertzis107
@anastasiosdemertzis107 4 жыл бұрын
You are correct. However, remember the assumptions. We assume no costs or benefits for this model. Cost and benefits are later introduced for the pricing of forwards.
@shashankprasad8
@shashankprasad8 9 жыл бұрын
In the first example... we assume that the forward price will remain as 43$ and not change even after 3 months?
@MarkMeldrum
@MarkMeldrum 9 жыл бұрын
+Shashank Prasad A forward agreement, or a futures for that matter, is not an asset - it is a contract. Once we enter into a contract to deliver a specific asset for $43, or whatever the price is, that price will not change for the life of the contract. Now, the contract price may change from minute to minute, or day to day. That will affect others who enter into the same contract at different times. They will have different delivery prices. But mine will always be $43. Once entered into, the forward/futures prices becomes a firm delivery price. Imagine that you are an artist and I agree to buy one of your pieces from you for $2000 in three months once it has done touring the art galleries. However, while on tour you die. Your artwork increases in value. Well, too bad - I still get to buy that artwork for $2000 regardless of what happens to the price of the piece. The asset may change value, but my contract with you - the forward agreement to but the artwork in 3 months - will always have a delivery price of $2000 once entered into. Hope that helps.
@harryrandhawa1990
@harryrandhawa1990 7 жыл бұрын
Hey Mark. So for reading 58 - Are LOS A till H, covered in Chapter 5 and Chapter 4. I'm just trying to follow the order but just wanted to make sure. Thanks
@MarkMeldrum
@MarkMeldrum 7 жыл бұрын
If you just follow the order in the playlist you will be fine.
@cibga
@cibga 7 жыл бұрын
do u find from LOS a to h if yes plz tell me
@alejom3
@alejom3 8 жыл бұрын
Hi Mark, just to let u know that I think there is a little mistake in the selling side (written in green) as the future price should be 40,50 and not 40,25 as it is written. It can also be Im wrong.
@MarkMeldrum
@MarkMeldrum 8 жыл бұрын
+Alejandro Madrid Fixed
@mj6637
@mj6637 7 жыл бұрын
Is there a lag that exists between the spot price of a particular asset adjusting to and reflecting true market conditions and the futures price of the same asset? Or since the two are clearly a function of the other, a change in one is logically and immediately reflected by a change in the other? Great work as always, Professor!
@MarkMeldrum
@MarkMeldrum 7 жыл бұрын
Very fast - arb. firms are always looking for misplacing, so any misplacing is correctly quickly.
@mj6637
@mj6637 7 жыл бұрын
Yes, thank you!
@shashankprasad8
@shashankprasad8 9 жыл бұрын
Consider a 4-month forward contract to buy a zero-coupon bond that will mature 1 year from today. so in this scenario forward price F=Se^(r*(4/12)). So for the rest of the 8 month the bond stays at a fixed price calculated above....
@MarkMeldrum
@MarkMeldrum 9 жыл бұрын
No...the forward agreement only locks in the price you pay for the underlying, in this case the zero bond. After 4 months, once you take delivery, you now own a bond with all the price risk of ownership. The forward agreement is just a contract with a 4 month life.
@shashankprasad8
@shashankprasad8 9 жыл бұрын
+Mark Meldrum : then what is the significance of maturity after 1year?
@MarkMeldrum
@MarkMeldrum 9 жыл бұрын
+Shashank Prasad I have no idea what you mean by maturity after 1 year. Imagine that you are an artist and I agree to buy one of your pieces from you in 4 months at $2000. That is a contract we have entered into for the purchase of your artwork. No matter what happens to the price from here until the delivery date in 4 months, all I pay is $2000. Once the delivery dat passes I now own the artwork. If the price drops, I lose, if it rises I gain. The example you gave is the same thing. In 4 months I take delivery of the zero coupon bond. 8 months after that the bond matures and I get my money back from the bond. All bonds have a maturity date. That has nothing to do with the delivery date of the forward agreement. The bond is the asset (the artwork) and the forward agreement is just a contract.
@luanyao1525
@luanyao1525 6 жыл бұрын
Dear Mr Mark, Do you have lectures on the remaining chapters? Thanks
@MarkMeldrum
@MarkMeldrum 6 жыл бұрын
What is here is all i have.
@luanyao1525
@luanyao1525 6 жыл бұрын
It's pity! Will you provide more in the future?@@MarkMeldrum
@ellia3213
@ellia3213 3 жыл бұрын
Everything clicked in cfa except this , DAMN IT!!!
@nickshen4629
@nickshen4629 8 жыл бұрын
I'm not I understand what you said if you cannot short. If you cannot short, how you gonna achieve the 40.50 shorting price even there are a lot of institutional investors hold the asset.
@MarkMeldrum
@MarkMeldrum 8 жыл бұрын
Any kind of selling will put downward pressure on prices. I don't have to short anything if there are current holders willing to sell.
@kevinassang3158
@kevinassang3158 7 жыл бұрын
Sir, i'm a bit confuse about the "cost of carry", doest it mean we cannot take the difference F - S*e^rt as a profit but as a cost? because it's like in the book(7th edition), the business snapshot 5.1 about KIDDER PEABODY is also trying to explain something like that. In this case where does the profit of an arbitrage come from? i mean when can we talk about profit not cost?
@MarkMeldrum
@MarkMeldrum 7 жыл бұрын
F - S*e^rt will equal zero on the initial day. Arbitage results from the futures price not being equal to the cost of carry. Profitable futures trading involves forecasting which way you think the underlying is going and betting in that direction. There are no free lunches. You want to make money - have a better sense of future price direction that the rest of the market.
@kevinassang3158
@kevinassang3158 7 жыл бұрын
i see now. thanks a lot
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