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Current time:0:00Total duration:3:19

Video transcript

let's see if we can understand a thing or two about futures curves and I've drawn two futures curves here and really all they show is the different the different settlement prices for the different delivery dates of futures so let's say that this orange curve is one of them what this says is if today if for delivery today we wanted to buy or sell an apple the market rate is 10 cents a pound so this isn't a futures contract at all this is actually called the spot price it's essentially the market price for that commodity or that security today we're just using the example of Apple so this tells us at time zero you can buy or sell an apple based on the current market for 10 cents now when we move to one the way I have labeled this axis it says one month one month from now this is not saying that the market price is going to go up one month from now this is saying that today if you were to go into the futures market and say I want to sell or I want to buy apples one month from now what type of a settlement price can I get on my futures contract and based on this futures curve it looks like we could do about 12 cents I want to let me I just want to read what I just said this is not saying that a month from now that the market price that the spot price is going to move up only this time zero is the spot price what this say is saying is right now the market is saying if you want to enter into a futures contract for delivery a month from now that delivery price will be 10 to 12 cents if you want to deliver two months from now that delivery price will might be around 15 cents if you want to deliver eight months from now that delivery price might be something like 20 cents if you wanted to show movement let's say all of a sudden people just get more bullish on apples or there's some new diet that tells everyone that apples help you lose weight what you would probably see is this entire curve would shift up so regardless of delivery date you would probably see this entire curve shift up because people would want apples across the entire across the entire futures curve and this one that we're highlighting right now I've drawn two futures curves I've drawn an upward sloping orange one and I've also drawn we're sloping blue one and I'll focus on that one in the next video but this upward sloping is kind of a normal curve and it's actually called that it's a normal curve because this is what you actually expect for most types of commodities and you could imagine why if this if if you if this wasn't upward sloping there would actually be no reason for you to hold on to something especially if this was downward sloping you'd be like wow if for future delivery dates I'm getting lower and lower prices why don't I just sell now and that would actually create downward pressure on the current spot price and you could of course make the arbitrage arguments I've made in previous videos why you shouldn't you know in a theoretical setting see a downward sloping futures curve but we're gonna talk a little bit about in the next video is maybe why you would see a downward sloping futures curve where the delivery price for for delivery further out than the spot price or for further out months the nearby months is actually lower and just to give you a little terminology this type of curve right here is called an inverted curve and I'll talk in the next video on why you might see one of those