Hi Bionc Turtle: when the interest rate goes down and Futures prices goes down, for futures contract buyers they will deposit money at lower interest rate. However, forward contract holders donot have to deposit daily even they lose so they could use that money to invest to earn excess money and only have to pay the lost when contract matures. Hence, forward contract holder will be more beneficial than futures. Therefore, forward prices should be higher
Thanks. So to get the forward price (rate) from the futures price (rate) we would need to make at least 2 adjustments - a convexity one and a correlation one?
I see that you've mentioned a "long" position on the contract for the price difference. won't a "Short" position have the same effect as well? (thanks in advance :))
Hi, just about your correlation expression, when you was saying positive correlation you wrote +p(S,r), and when you was saying negative correlation you also wrote +p(S,r). Is the negative correlation -p(S,r)?
first of all, love the videos as I have mentioned in other comments. just one suggestion, maybe it's too much extra effort... but if you were to put annotations within the video linking to your other videos whenever there is an overlapping topic being discussed, it would not only increase your views but also be even more effective ;) for example, in this video you touched on basis risk, and I know you have a video discussing that. thats just my thought tho. still amazing vids :D
@ 5:35 "if the value of the (Forward) or (Futures) contract is going down..." It would be the Futures contract, correct? Not the Forward contract as stated. Thank you very much for posting these videos. Sincerely, -R.W.N II
In Futures the P&L(Profit & Loss) is effectively being taken every day through the variation margin while with an FRA the P&L is taken in one go, at settlement. The FRA settlement is discounted st Libor, which unrealistically assumes you can invest your money at that rate, but this is just market convention.
Great vid. Love all of them. Isn't the margin account invested in some sort of risk free securities? So, it does earn interest. I guess you just assume that there will be more favorable opportunities that you can use excess margins for.
it can be invested but the security must be accepted as a deposit, and it actually has smaller value than actual cash from the margin account( 5k in bonds is less than 5 in cash because of market value)
@smokenfly514 Nope. The margin requirement is imposed by the exchange. Since forward contracts are traded over-the-counter (not on an exchange) there is no margin account.
How does the spot price of a future contracts decline have a correlation with the rate at which a player can borrow money? Im failing to understand that point.@bionic turtle
When interest rates fall the currency depreciates and a currency appreciates when interest rises, because its more attractive, therefore spot and i are positively correlated in currency futures. Where as for bond futures its the opposite, Spot and interest rates are negatively correlated.
Hi Bionc Turtle: when the interest rate goes down and Futures prices goes down, for futures contract buyers they will deposit money at lower interest rate. However, forward contract holders donot have to deposit daily even they lose so they could use that money to invest to earn excess money and only have to pay the lost when contract matures. Hence, forward contract holder will be more beneficial than futures. Therefore, forward prices should be higher
Thank you boss ! . You are better than my lecturer who is specialized in math
You're welcome! We are happy to hear that and appreciate you watching!
Thanks! Much better explanation than the textbook.
+Peter Kuzmin You're welcome! We are happy to hear that our video was so helpful! Thanks for watching!
Very simple yet thorough, thank you.
You're welcome! Thank you for watching!
Great video
Thanks. So to get the forward price (rate) from the futures price (rate) we would need to make at least 2 adjustments - a convexity one and a correlation one?
I see that you've mentioned a "long" position on the contract for the price difference. won't a "Short" position have the same effect as well? (thanks in advance :))
thanks for the great video!
Your videos are really good ******.
It is very kind of you to put effort and time for educating people in genreal, which is very noble. tks
1:18 ; yes, no counter-party risk with exchange-traded futures, but it’s not the exchange that assumes the risk - it’s the clearinghouse.
Can u explain the in simple terms the diff. b/w exchange and clearing house...?
Thanks a lot for giving a brief and good difference of Futures and Forwards.
very well explained!
with absolute clarity
great channel!
Hi, just about your correlation expression, when you was saying positive correlation you wrote +p(S,r), and when you was saying negative correlation you also wrote +p(S,r). Is the negative correlation -p(S,r)?
first of all, love the videos as I have mentioned in other comments.
just one suggestion, maybe it's too much extra effort... but if you were to put annotations within the video linking to your other videos whenever there is an overlapping topic being discussed, it would not only increase your views but also be even more effective ;)
for example, in this video you touched on basis risk, and I know you have a video discussing that. thats just my thought tho. still amazing vids :D
@acidentallycool It's my pleasure, thanks for viewing!
Great explanation
Thank you for watching!
Excellent video, you explained the concept really well !
Hello Sir, what happens when the correlation (spot and interest rate) is strongly negative?
@ 5:35 "if the value of the (Forward) or (Futures) contract is going down..." It would be the Futures contract, correct? Not the Forward contract as stated.
Thank you very much for posting these videos.
Sincerely,
-R.W.N II
Been searching for this explanation all over the net! Thank you so much! 🙂
Can I know what are the factors that will affect the value of interest rate future contracts?
Any derivation of convexity adjustment for Eurodollar futures?
David, cant thank you enough. Thank you so much!
But in downside .. we will also have to pay interest on borrowing .. even if it is minimal amount then isn’t in that scenario forward more attractive?
really good videos. love your way of explaining things!
excellent explanation!
Wonderful job and thanks for your efforts.
Best Wishes
Hi. Great video, thank you.
Question: Why do FRAs settle the present value of the payment at expiry while Eurodollar futures do not?
Thank you.Eric
In Futures the P&L(Profit & Loss) is effectively being taken every day through the variation margin while with an FRA the P&L is taken in one go, at settlement. The FRA settlement is discounted st Libor, which unrealistically assumes you can invest your money at that rate, but this is just market convention.
Hello, i cant find any broker selling forward contract. Do you know a website/marketplace that can do so? Thanks for your video!
Thanks so much for clear explanation
Very helpful, thank you!
+liesus720 You're welcome! Thank you for watching!
Great vid. Love all of them. Isn't the margin account invested in some sort of risk free securities? So, it does earn interest. I guess you just assume that there will be more favorable opportunities that you can use excess margins for.
it can be invested but the security must be accepted as a deposit, and it actually has smaller value than actual cash from the margin account( 5k in bonds is less than 5 in cash because of market value)
@smokenfly514 Nope. The margin requirement is imposed by the exchange. Since forward contracts are traded over-the-counter (not on an exchange) there is no margin account.
it depends on the market, in Brazil it's common to forward on exchange and both OTC and exchange forward there's a requirement for margin account
How does the spot price of a future contracts decline have a correlation with the rate at which a player can borrow money? Im failing to understand that point.@bionic turtle
+Zach Barillaro For example, if you go long eurodollar futures, you could see the corr between spot price and interest rate
Because this sh!t is only in theory man . And in theory they assume every fuking thing lelele
When interest rates fall the currency depreciates and a currency appreciates when interest rises, because its more attractive, therefore spot and i are positively correlated in currency futures. Where as for bond futures its the opposite, Spot and interest rates are negatively correlated.
Rocky Bo
thank you man !!
Thank you!
thanx alot...
David Harper = the king
That was a spam :\ I didn't put it.