Pricing Financial Futures (Part 1 of 2)

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/
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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. See part two of pricing futures for adjustments to the formula that we learn in this video.
Make sure you also watch the video on Convenience Yield being released tomorrow.

[@rustyray420]

Im surprised these videos don't have more views lol they are very helpful, thanks Patrick!

[@samuelspencer5047]

10 years later his videos may have more views. Quality is rare and when it exists it is not easily discovered or wildly know. This is in favour of the few who discovered it.

[@avernvrey7422]

Calculators mentioned are probably the venerable HP 12c and/or Texas Instruments BA II Plus (or the ti BA II Plus Professional).

[@Philogy]

It's not a large difference but why does one calculate e^(0.05 * 3 / 12) for the interest and not 1.05^(3/12) ? EDIT: Nevermind it was explained towards the end, e^(rT) is the continuously compounded interest rate while (1 + r)^T is not continuously compounded.

[@lucaambrogioni]

Great video! Very informative and easy to digest as usual! Future pricing is surprisingly straightforward

[@salimrhmaritlemcani1936]

Really helpful to go back to basics when we get lost. Thanks for clearing things out! Would be nice to see how you would simulate these prices and backtest strategies with backwardation and/or contango

[@mailadoctor2133]

why didn't I have these types of lecturers in my university?😭I could be chowing 100% by now

[@davidsammuels8445]

nice one Pat

[@80amnesia]

thanks, your videos are great

[@rimonchoudhury672]

Great Video - but more illustration and examples will be very helpful.

[@aronkapa8973]

great knowledge

[@kwadwoamponsah]

Where is the financial calculator recommendations? I only see a link to the Amazon book.

[@tashtant]

Patrick the Amazon link loads an empty page, you may need to look at it and the calculator names and links are missing also. Good video.

[@GregThatcher]

Thanks much!

[@laurentalhallal8218]

Great video, but I just dont understand how the prices of futures can fluctuate if it is already predetermined at the time of the creation of the contract

[@cristianandrei5462]

I think when we are trying to understand how financial derivatives are priced it would be helpful if in our not real world examples we assume that the interst rate is 0, it is easier to understand the rest of the factors...

[@hamiltonsivula5304]

Can you please explain the time variable? Is days/days in a year equivalent? What about weeks/weeks in a year?

[@zilitron2k]

The time is relative to the interest rate definition. If the r = 5% annually, then time needs to be expressed in years. If it’s 5% daily then time is expressed in days

[@zakyali3524]

why was the rate not divided by 12 to express monthly rate

[@edosaodigie1058]

Why do we use continuous compounding? and not just compound for example

[@improvingdoomer3110]

Future contract are traded every second If we used normal compound intrest then person buying at any time in day will pay same intrest rate which is not very convenient

[@richwu6752]

May I ask why use “e”, why not just use simple or compound interest calculations

[@nathanthemoneyman9191]

Because "e" enables continual compounding, whilst compound interest calculations only calculate at the end of a period (say, a month.) Look up calculus/integers, or don't and just trust the formula lol.

[@richwu6752]

@@nathanthemoneyman9191 Thanks for the explaination. I am the sort of person would not give up until I fully understand it.