Pricing Financial Futures (Part 2 of 2)

Today we will learn about pricing financial futures
These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. amzn.to/2WIoAL0
Check out our website www.onfinance.org/
Follow Patrick on twitter here: / patrickeboyle
Pricing Futures: When the deliverable asset exists in plentiful supply, or may be freely created, then the price of a futures contract is determined via arbitrage arguments. This is typical for stock index futures, treasury bond futures, and futures on physical commodities when they are in supply.
When the deliverable commodity is not in plentiful supply or when it does not yet exist - for example on crops before the harvest or on Eurodollar Futures or Federal funds rate futures (in which the supposed underlying instrument is to be created upon the delivery date) - the futures price cannot be fixed by arbitrage. In this scenario there is only one force setting the price, which is simple supply and demand for the asset in the future, as expressed by supply and demand for the futures contract.
Make sure you also watch the video on Convenience Yield being released tomorrow.

[@theone9273]

Would be awesome if you added an example problem or two that you worked through. Or a real world example based upon a current underlying price.

[@rimonchoudhury672]

Absolutely

[@abookmaker6344]

Very helpful. Excellent - I enjoy your more recent content, of course, but this series of videos is proving exceptionally useful.

[@andrewkaplanc]

These two videos were super helpful, thank you!

[@DJREKing1]

I love learning about this, I’m relatively new to the subject and I have only been in the stock market for about a year and a half but finding your channel has really changed the way how I view the market and it’s really been the help that I need, thank you very much🙏

[@jsdevtom]

That subtle 1000 oil barrel capacity shed flex.

[@quotidien_]

Your videos are all excellent.

[@jahlove4211]

Hello Patrick Wow, you really have an ability to educate! This is some heavy shit yet I am hanging on to every word. Thank you for helping me get my head around this market stuff. Curious if you've ever made a video on the collapse of a clearing house?

[@jsdevtom]

Thank you for your video. An example would have been very helpful to work through.

[@jsdevtom]

Never mind - it's in the book. Thanks

[@rimonchoudhury672]

Please recommend which book to buy for fair pricing derivatives - I need it for my under grad course.

[@DJREKing1]

Love your videos

[@antoniolico9232]

Professor boyle. Thank you very much for you videos. Do you have your book on audiobook form.

[@antoniolico9232]

??

[@freddybenelli9100]

I love the little joke about the book being available "in lots of libraries."

[@trucksrus6321]

Is there an xl sheet for this?

[@edosaodigie1058]

But if the dividend, is giving before the expiry date of the future do I need to use that formula?

[@Indrius]

It doesn't matter when the dividend is paid out. We're dealing with annualised rates. Dividend rate has to be taken into account on a continuous basis, not on the payout day. Imagine dividend is paid once a year, on December 31st. If it cost the same to buy on Jan 1st and December 1st, it would not make any sense, because in the first case you'd be waiting for the payout for 12 months and in the second case only for 1 month (effectively making the return rate 12 times bigger! it'd be arbitraged out right away).

[@goviki6124]

I`m not going to lie: I found Your channel thanks to Coffeezilla and I love it. I am a beginner myself so there is a lot of things you cover that I do not understand but I`m stopping the video and googling the simple explanation. If it would not be a huge problem, could you put a screens with examples from time to time? Like you`ve done the formula one but on a hypothetical example. There is a lot of people that are learning more by looking at things rather than just listening and I`m one of those cases (plus English is not my main language but I`m improving). So let`s say instead of the formula could you put, for example: F0 = 40 x 0.15(9-7)3. I`m not mentioning finding all those numbers as I don`t want to look like a total ignorant so I`m, as already mentioned, just googling the terms myself. I do know that there are calculators for that but I want to understand it so I will never forget it.

[@itemushmush]

im just a lowly physicist here but in your example, you seem to be missing 'e' - that is absolutely crucial to use. "e to the power of rt" sort of thing. in fact, most calculators have an "e" button, so you don't technically need a financial one but it would help. these small equations you could handily do on most calcs (apart from the basic ones with just the +-*/ buttons)

[@goviki6124]

@@itemushmush I`m lowly Biologist and Chemist... there is a little bit of counting there but if it comes to numbers, formulas and tools to use you probably beat me by a mile. I`ll take a look. Thanks for that.

[@rimonchoudhury672]

Examples pls Patrick - you can talk us through the examples also.

[@michaciurej9680]

I would like to ask you a question about pricing futures. I think there is an issue which has not been taken into account at all, but sometimes it may have considerable influence on market price of derivatives or even profits from arbitrage. I am talking about volatility risk. When it comes to futures, investors have to pledge additional funds every day for maintenance margin requirements. If one has a short future position and bought a stock as a hedge, when stock price is going up, one has to borrow some additional capital for maintenance margin requirement. When average price of the stock (in the interval from making an arbitrage trade until settlement of future and selling stock) is much higher than expected, it results in considerably higher cost of credit. I know that it smells much more like topic for options (where volatility is an essence) but I was wondering if that risk is taken into account in professional trading. If yes could you tell me please, how that risk is evaluated? Should arbitrager just use normal distribution for volatility, or just buy additional calls when shorting futures? What about opposite transactions (short selling stock, buying future)? What about the fact that when price is rising, margins which are usually calculated as a percentage of current/closing price increases significantly?

[@robertplatt643]

I cannot be trusted around chocolate Hanukah coins either.