Finance and capital markets
- Forward contract introduction
- Futures introduction
- Motivation for the futures exchange
- Futures margin mechanics
- Verifying hedge with futures margin mechanics
- Futures and forward curves
- Contango from trader perspective
- Severe contango generally bearish
- Backwardation bullish or bearish
- Futures curves II
- Contango and backwardation review
- Upper bound on forward settlement price
- Lower bound on forward settlement price
- Arbitraging futures contract
- Arbitraging futures contracts II
- Futures fair value in the pre-market
- Interpreting futures fair value in the premarket
Forward contract introduction
Forward Contract Introduction. Created by Sal Khan.
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- What happens if the farmer has a bad harvest and doesn't produce a million apples? Does he have to buy them from someone else to give to the pie shop owner?(24 votes)
- OK, Sal answers this in the next video.(26 votes)
- Is it compulsory for both the parties to execute the contract?(5 votes)
- Yes, hence the word contract, or otherwise one side of the contract would have breached the contract. Unless both parties agree to nullify the contract.(3 votes)
- What happens if the farmer has a bad harvest?(3 votes)
- That would be something written into the contract. What would be the provider's responsibility if he can't deliver the apples, what would be the pie makers responsibility if they can't pay...all that is agreed to beforehand in a futures contract(2 votes)
- Sir, can three or more parties be a part of forward contract?(2 votes)
- We have a buyer and a seller. What would the third party be there for?(2 votes)
- If I enter into a contract with a delivery, who pays for the delivery costs? The buyer or the seller? Let's say I enter into a contract for a few tons of coffee, I guess that the delivery cost isn't negligible.(1 vote)
- The delivery terms are set in the contract. The contract is for delivery to a particular place. That's where you pick it up. If you want it delivered somewhere else from there, you cover the cost.(2 votes)
- Does this Contract ac as Insurance on the price and quantity both parties - the farmer and the chain - agree to pay for and get from each other. regardless of market price fluctuations of the product ?(1 vote)
- Too add real value to these lecture, a questioner/multiple-choice/exercise must follow; otherwise, it's just another YouTube video with little academic value.(0 votes)
- What are different in Options, Forward and futures contracts?
Option: The buyers can easily buy and sell without third party in the market
Forward: Can be negotiated by transacting parties and only the argreement between 2 parties. Transacting parties assume the counterparty risk.
Futures: Be standardized
Traded on the exchange and hence can be bought and sold to others.
Do not expose to counterparty risk. Exchange assumes it.
Why futures contract is more suitable being a speculator than forwards contract?(0 votes)
- why it must $0.20 why it cannot be $0.10 or $0.30(0 votes)
- He just used $0.20 as an example. In an over the counter (OTC) transaction between 2 parties they could agree on any price they wanted. If both parties though that apple prices were going through the roof next year, they could have agreed on $0.40/lb. On the other hand, if they thought there was going to be a bumper crop next year and a supply glut, they might have agreed on $0.07/lb. If you want a good comedic look at this stuff, try Trading Places (1983) with Dan Aykroyd and Eddie Murphy. It's not necessarily accurate and definitely not up-to-date, but it's pretty funny.(5 votes)
Every year this apple farmer produces one million pounds of apples. But he's got a problem. Every year the apple price jumps around a bunch. Sometimes it sells after the harvest for over $0.30, and this guy makes a ton of money per pound. And then sometimes it drops down to $0.10 per pound, and this guy can't even cover his costs. And on the other side of the equation, you have this pie chain right over here. So they specialize in making apple pies. And when the price of apples goes super high, these guys can't cover their costs. They start running a loss. But when the price goes really low, they have this kind of bonanza. But neither party here likes this scenario. They don't like the unpredictability of one year having a feast and then one year having a famine. So what they can do is, let's say we have the harvest coming up. The pie farmer is kind of afraid. Well, what if the price of pies goes back down to $0.10 per pound? Then he's going to go broke. The pie chain is afraid. What the price of pies goes up to $0.30 a pound? Then these guys are going to go broke. So what they can do is agree ahead of time, regardless of what the actual market price of pies ends up being after the harvest, they could agree to transact at a specified price. So they could set up a little contract right here. So they could set up a contract where the chain agrees to buy one million pounds at a specified date,-- let's just say after the harvest-- at the harvest for $0.20 a pound. This works out well for the chain because regardless of what the market price ends up being, they can ensure that they will pay $0.20 a pound, which is a good price where they could make a decent profit and at least they have the predictability and they can plan on things. And it works out for the farmer because he knows that a $0.20 a pound, he can cover his costs and pay his rent and pay his employees and feed his family. And it also takes out the unpredictability, the volatility for him as well. So what we have set up right here is actually called a forward contract. This is a forward contract. And what it is, as you can see, is in agreement and it's an obligation for both parties to transact in the future at a specified price. So at the time of this harvest when they write this contract, they would specify this date-- I don't know what it might be-- November 15. And at November 15, this farmer is obligated to deliver million pounds of apples. And then this pie chain is obligated to produce the money, to pay $0.20 a pound or essentially produce $200,000. And that way, they both are essentially able to avoid the volatility and make sure that they can survive.