Arbitraging futures contracts II | Finance & Capital Markets | Khan Academy

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Arbitraging Futures Contracts II. Created by Sal Khan.
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Finance and capital markets on Khan Academy: In many commodities markets, it is very helpful for buyers or sellers to lock-in future prices. This is what both forwards and futures allow for. This tutorial explains how they work and what the difference is between the two.
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[@djmoorewustl]

I was confused as to where the 5% came from as well. The confusion arose when @khanacademy stated that "once he sells the borrowed apples he then gets 5% of that", without explaining that the individual took the $200 and invested it in a bank account with a 5% risk-free interest rate. Thus, at first glance it appeared that the 5% of $200 simply came out of nowhere.

[@janmejaybhaskarwar948]

exactly

[@theokpianocoverguy]

Lol took me some time to understand this one. Basically borrows apples, sells the apples for money. Takes the money, puts it in the bank, it earns INTEREST. Then closes out futures contract (spends money), gets the apples back and returns them to the person that he borrowed them from. Cuz of the numbers, only the interest he earned over the year is left. Some of that goes to the guy he borrowed the apples from, and he keeps the rest as risk-free profit. The risk-free profit wouldn't be there if the futures contract was correctly valued...

[@haydenstevenson9312]

Thanks for explaining that

[@CM_Burns]

yes he basically short sold the apples and bought them back for the same price but still made a 4% profit by investing the revenue from the short sale.

[@Rahulgusain9811]

This comment taught me better than the whole video

[@khanacademy]

@Manodragon A financial network has expressed interest in showing these videos on their website (and possibly their TV channel). They need to be under 4 minutes though. I am still getting used to not having as much time as I'd like :)

[@server1ok]

the 5% is a risk free interest rate, at a insured bank account or federal bond

[@khanacademy]

@siggyboss Yes, if we are dealing with futures contract, the exchange would have required an extra 10% in the margin account. Borrowing this money at, say, 10% would lower the profit somewhat (by maybe $2) but it will still be there.

[@chorweiyeoh1337]

Could you recommend a trading platform that will allow you execute arbitrage futures contracts or a broker?

[@HideHairLoss]

Can we clarify that the "interest on $200 loan: 10% per year" written in pink is an error and should instead say 5%? Such a minor thing for them to add a note in a pop up bubble or in the description, but such a time consuming inconvenience for people learning and who can be easily thrown off by such a thing. Never given a thumbs down on a Khan Academy video, but you've left a decade of confused students in your wake, so you deserve this one, old chap. lol

[@yousifmahgoub2332]

Where would u be getting the interests from in this situation?

[@jting4165]

don't understand where the 5% is from. aren't borrower paying interest to the lender?

[@cx5442]

The individual took the $200 and invested it in a bank account with a 5% risk-free interest rate.

[@DOlea-bh1yk]

this is called reverse cash and carry arbitrage

[@imbagogo]

@khanacademy What I don't get is - where would he be earning that 5% interest from? Thanks

[@samarthraizada]

Dude, once you get the money, invest it in a savings account for a year or something!

[@aqn6041]

why don't the person you borrowed the apples from, sell the apples himself then use the money to earn interest?

[@jeronimoisazadiaz2537]

Great video, thank you so much for what you are doing!

[@Denkzellen]

thank you so much for this video it really helped me to finally understand it^^

[@vway2]

Maybe I missed it, but where did the 5% come from?

[@bengriffin5146]

It's the interest collected from selling the apple and lending the cash

[@Manodragon]

@khanacademy aha. I see. :) btw, thanks for magnetism and derrivating functions. those vids really helped me. I look forward to learn a lot more. and Im spreading the word here in eastern europe. everyone Ive recommended khanacademy replied with very positive feedback

[@imbagogo]

What I don't get is - where would he be earning that 5% interest from? Thanks

[@khanacademy]

@vway2 Just made it up.

[@Manodragon]

something of topic...why are you keeping this short? Ive seen you history vids with 17 minutes. . .

[@johnybravo5667]

Shorting apples :))

[@MuhammadRafy]

kek

[@kingtigercrownestate9102]

All of this effort just to make $8.