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Current time:0:00Total duration:4:01

Video transcript

let's say that the settlement price for delivering 1000 pounds of apples on October 20th which we're going to assume is one year from now let's assume that it's $200 let's also assume that the current market price for a thousand pounds of apples is also $200 so that future settlement price is the same as the current market price and we're also going to assume like the last example that these apples that we have never go bad they're just things that they'd never rot or anything so there's good in a year as they are right now let's also assume above and beyond the assumptions of the last video that we can borrow and sell apples in the current market that we can actually short apples and when I borrow so I go to someone who's got a thousand pounds of apples who doesn't really see any need for them over the next year and say can I borrow those apples and what I do is I say I'll borrow those apples I'll sell those apples in the market today and of the interest that I get on those apples I'm going to give you 1% the person who actually owns the apples and that person says oh sure why not that way I actually get some money on my apples that I had no intention of using for a year and then I as the borrower and seller will get 4% net I'll get 4% net on the apples so given this reality what could I do once again to make a risk-free profit well as you can imagine I can borrow and sell the apples for a year so let me write this down I'm going to borrow and sell 1,000 pounds of apples 1,000 pounds of apples so if I just borrow it today and sell it today's market price is $200 for a thousand pounds so I'm going to get I'm going to get 200 I'm going to get $200 now on top of that what I want to do is agree to be the buyer I want to be agreed to be the buyer on this futures contract so let me write that down agree agree you could say to go long the futures contract or agree to be buyer to be buyer on futures contract on the futures contract so I'm agreeing a year from now to buy a thousand pounds of apples for $200 so let's fast forward let's fast forward one year so what's happened so of the two hundred dollars I got from shorting the apples I got five percent on that but had to give one percent to the person I borrowed the apples from so I'm getting four percent net four percent on two hundred dollars is to is eight dollars so now I now have I now have two hundred and eight dollars because I got that four percent interest it was two hundred and ten I gave two dollars to the person who lent me the apples now I can use two hundred dollars of that to essentially uphold my part of the futures contract to buy the apples for $200 for that agreed-upon price so $200 $200 to buy apples buy apples and I know I can do this regardless of what the market price is because that was that was the delivery price on the futures contract so now I have eight dollars net now I have eight dollars net and those apples that I've just bought those thousand pounds of apples I can then use those apples to return it to the person that I borrowed the apples from so they got their apples back and they got that one percent on the two hundred dollars over the course of the year and I made a risk free eight dollars so if you think about it once again this is kind of setting a lower bound on what the actual settlement price on the futures contract is I should not be able to make this risk-free profit if it's available then people will do it and what it will do is it will increase demand to be the buyer here so this price should go up and it would increase supply on the selling side here and so maybe this price over here would go down