Options, Futures and Other Derivatives Ch1 Questions Part 2

[@DanielMathew-p4c]

So when you say choosing the right currency, do you mean to choose the currency which would make us use a call option? Why is it so? Is it because call options are easier in plotting and understanding compared to puts?

[@Dev-lk6zo]

I am also think the same. Its challenging to understand now. Seen three times again and again but can't understand. Hope so next chapters grow my understanding level

[@newtotheshoegame]

Lol I still find it challenging still got a lot of work to put in for December. Thanks for the video!

[@stijndhondt9611]

How do you justify drawing the straight line between 84.5 and 169? 1/S_T not linear, is it an approximation or am I missing something?

[@MarkMeldrum]

All these payoff diagrams are at expiration.

[@stijndhondt9611]

@@MarkMeldrum Yes, but we are considering dependence on S_T, which is the stock price at expiration. I still don't see how this makes the graph linear between 84.5 and 169.

[@tylerdurden6273]

@@stijndhondt9611 I too think the same. There is a mistake.

[@Luqman752]

Good video sir but still its challenging to understand the question

[@parush2007]

Great educational video. But one thing I want to ask when we buy and sell options the premium receive /paid will move the graph by "x' amount . Then does it not deviate from the actual graph we intend to make?

[@MarkMeldrum]

That will be a profit/loss diagram, not a payoff diagram.

[@klnmn3722]

Thank you for the great explanation on 1.23, I facepalmed after thinking about the currency situation. However, you didn't walk through the actual payoff functions, just the shape of the payoff plots. I would have appreciated seeing the actual math as I'm still not sure how to show how to get the actual payoff function as written in the problem statement from the individual payoff functions.

[@martinspage]

yea pretty sure that first plot is wrong, the one with dollar payoff as a function of S_T (yen per dollar). 1/S_T is not a straight line.

[@OttoFazzl]

What is the point of flipping currencies?

[@MarkMeldrum]

As a currency trader, you get paid in one currency or the other depending on how you trade it. EUR.USD pays off in USD while USD.EUR pays off in EUR.

[@huongnguyenthu2462]

Can you help me with this question? The spot price of oil is US$95 The quoted 1-year futures price of oil is US$80 The 1-year US$ interest rate is 5% per annum The storage costs of oil are 2% per annum Is there an arbitrage opportunity?

[@huongnguyenthu2462]

Now: long the future @ 80 Sell oil (spot) @ 95 Invest 95 Payoff in 1Y = + 95 x (1+5%) - 80 = 19.75 In 1 year: you pay 80 · (1+5%) = 84 for the Forward and get 95 · (1-2%) = 93.1, thus make a profit of 9.1.

[@huongnguyenthu2462]

I don't understnd the last line of the answer, shouldn't the Payoff be 19.75 only?

[@kaiwang2924]

The most counterintuitive aspect of this is that the reversed function isn't precisely the mathematical inverse function. However, in practical application, it is correct. Please correct me if my understanding is incorrect.

[@stephenyau6417]

Hi Mark, the equation in the middle of Q1.23 should be: 1000 - max.{0, 2000(1 - S_T/169)} instead of 1000(169/S_T - 1) But still, thank you for your awesome work!!

[@MarkMeldrum]

no.

[@stephenyau6417]

For example, if you substitute a value (84.5+169)/2=126.75 as S_T, which is the mid-point into the original equation, it should be expected to be the value of 500. But this is not the case when using 1000(169/S_T - 1) If I was wrong, could you point it out? coz I have thought about it for quite some time to come up with the conclusion that it is wrong. Thank you.

[@fawzibriedj4441]

Yes, you are right Stephen, 169/ST is an equation for hyperbola not a line!

[@fawzibriedj4441]

Actually, I think the equation was right but the drawing was wrong, that's why it works out when he switches to $

[@xiaochenpan314]

The function for 169/ST even cannot be drawn with 2D vector, I think. Coz for X axis, it is in JPY and it should also be in JPY for Y axis; otherwise, we use 3D vector (for $ converting to JPY). But it would be easier for us to understand the question by imagining that as a line. And switching to $ can solve everything.

[@GraciaEdhyta]

soo goodd, thanksss😁

[@aniketjaiswal1456]

mind boggling