30. Options, Futures and Other Derivatives Ch5: Forward and Futures Prices Pt5

Valuation of a Forward or Future price
Text Used in Course:
Options, Futures, and Other Derivatives
Ninth edition
Hull, John
Publisher: Pearson

[@harrywright3037]

This chapter wasn't going into my head at all! Thanks for your help. Wish I'd found your channel sooner.

[@marisa4942]

This is a fairly difficult concept to understand, but you explained it so clearly! Thank you!!

[@darriuscole8544]

This notation is confusing me. There's two F0's listed here. The F0 listed in the final equation refers to F0 as time X, right. About K and K1, I don't know which one is being referred to in the equation. If K1 is the delivery price of the original contract at time END, shouldn't K equal delivery at time inception which would equal the spot price at time inception, which would be S0. I think what you are saying is f= (F0 at time x - K1)e^(-r*t), where f = cost of buying the original contract, and F0 = cost of negotiating a brand new contract at time x. But I'm not sure. Can you help me?

[@lukasschmidt5183]

Taken from the Book: "Using the notation introduced earlier, we suppose K is the delivery price for a contract that was negotiated some time ago, the delivery date is T years from today, and r is the T-year risk-free interest rate. The variable F0 is the forward price that would be applicable if we negotiated the contract today. In addition, we define f to be the value of forward contract today. It is important to be clear about the meaning of the variables F0, K, and f."

[@rockbrijesh26]

Can we also say that the value of the contract at any time t will be [ Spot price at t - (PV of the original future price at t)].

[@MarkMeldrum]

Yes

[@rockbrijesh26]

@@MarkMeldrum thanks sir

[@mrBadge207]

Hi Prof, this video/slide is not in the notes though?

[@BNJ53]

Hey Mark, is this topic in the curriculum or you just put it in the playlist as extra? Because it's not in your notes and Im wondering if I should write this down. Thank you

[@MarkMeldrum]

it is in the curriculum, but the book explains it poorly, so i am using the Hull videos to fill it in.

[@mehhakk23]

Hi Mark. I have a question here why we have not use K1 - K2 instead of using K2- K1 as Party1 is from inception till the end and then subtract the Party 2 which came just 6 months before the expiration date?

[@MarkMeldrum]

Think of it this way. If you buy a stock at $10 and sell at $12, would you say your profit was 10 - 12 or 12 - 10?

[@mehhakk23]

ok..yup...got you..

[@OttoFazzl]

Does the value of the first long contract at the end equal (S1 - K1) x (size of contract). Is it the same as profit / loss / payout of contract?

[@MarkMeldrum]

Long value will be (spot - contract price). Value is the payoff since futures are free to enter into.

[@samickgb]

Hi mark I dont know if this will be clarified later or theres a shortcoming in my understanding but heres my doubt: Earlier in the cfa playlist while describing mark to market for futures, you showed how for 1000 barrels of oil at a future price of say 40, if the price changed the next day to say 41, the buyer would gain $1000 and the loser would lose $1000. Here we did not consider the value but only the future prices from day to day. So how does that relate to the calculations for value that THIS video shows?

[@MarkMeldrum]

It can be ignored. Futures contracts are MTM, forwards are not.

[@samickgb]

Mark Meldrum great. Thanks for the prompt reply :)

[@Stalysfa]

Maybe it's because the video is from 2015 but I really do not think it is part of the derivatives chapter anymore, correct ? I mean, when I look at the different LOS, it is not specified once to know, interpret or calculate the value of a forward contract. It seems it now only concerns option values. Am I correct ? Yet, I've watched it all for my own curiosity and great video as usual !

[@MarkMeldrum]

The playlists on KZbin are setup for 2017, not 2018.

[@karthiktsam]

Hi Mark , I am not able to find pt6 video after this one , could you give me the link for it please ?

[@MarkMeldrum]

not required. But it is in the Options, Futures and other Derivatives playlist if you really want it.