FRM: Why a futures price differs from a forward price
Vložit
- čas přidán 1. 09. 2008
- Why would the prices differ? The key difference is the daily settlement of the futures contract. The investor in a futures contract must maintain a margin account. The key issue is the correlation between the spot price and the interest rate. If the correlation (spot, interest rate) is strongly positive, an increase in the spot implies an increase in the forward/futures value (recall delta equals approximately 1.0 for both). But only the futures contract is settled daily. In this case, an increase in value implies excess margin; the excess margin can be withdrawn from the margin account and (owing to the positive correlation) invested at a higher interest rate.
For more financial risk videos, visit our website! www.bionicturtle.com
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! 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!
@acidentallycool It's my pleasure, thanks for viewing!
Thanks a lot for giving a brief and good difference of Futures and Forwards.
Very simple yet thorough, thank you.
You're welcome! Thank you for watching!
Great video
David, cant thank you enough. Thank you so much!
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!
Been searching for this explanation all over the net! Thank you so much! 🙂
Excellent video, you explained the concept really well !
very well explained!
with absolute clarity
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...?
really good videos. love your way of explaining things!
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
Thanks so much for clear explanation
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
excellent explanation!
Thank you!
Very helpful, thank you!
+liesus720 You're welcome! Thank you for watching!
Wonderful job and thanks for your efforts.
Best Wishes
@ 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
great channel!
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)?
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?
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.
thanx alot...
@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
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?
Any derivation of convexity adjustment for Eurodollar futures?
Hello, i cant find any broker selling forward contract. Do you know a website/marketplace that can do so? Thanks for your video!
Can I know what are the factors that will affect the value of interest rate future contracts?
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 !!
Hello Sir, what happens when the correlation (spot and interest rate) is strongly negative?
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)
Great explanation
Thank you for watching!
That was a spam :\ I didn't put it.
David Harper = the king