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
What is the Futures Fair Value and how to traders use it as an indicator for stock price direction at market opening. Created by Sal Khan.
Want to join the conversation?
- i dont get something....
usually Sal compares prices of a good in present time with prices of a future(right to buy or sell that good somewhere in the future)
In here though he is comparing with the price of a stock...
how does that work?(2 votes)
- Yes there's a future market for stocks. The S&P 500 cash and S&P 500 future are completely different products. Whether it's pork bellies, interest rates, or the S&P 500, buying or selling a futures contract represents making a bet on the future direction of the underlying commodity.An agreement to buy or sell the S&P futures amounts to a bet on how the index of stocks will behave over time. And like any financial security, its value changes moment to moment based on what traders will pay for it.(5 votes)
- I thought that the stock market and the futures market were two separate markets. Isn't that true? Also this movie seems out of place what is the right sequence? Thank you(3 votes)
- It's essentially the same lesson as the previous videos in this sequence, showing how the lower and upper bounds are dictated by the ability to arbitrage. However this is an introduction to fair value, which is a bit more complex given that stocks have dividends, and that the futures markets trade longer and so are often used as indicators for stocks.(1 vote)
- 0:23What is meant by "to go short"?(1 vote)
- You "go short" when you believe the underlying asset is going to decrease in value. What you do is you borrow the asset from someone else, sell it in the open market, and then eventually return the asset to the person you borrowed from. For example:
Apple stock is trading at 97.00 and you think it's going to decrease in value. You borrow a share, and sell it so you now have 97.00 is profit but owe someone a share of Apple. The price decreases to 95.00, you buy it back and return it to the person from whom you borrowed, and you've profited $2.00.
In general, going short refers to any time you are either selling an asset or expecting the asset's value to decrease.(2 votes)
- Fair value of future contract formula(0 votes)
- Assuming no discrepancy between Future Price and Fair value:
Fair Value = Present Price * (1 + R/100), where R is the risk-free rate of return.(1 vote)
Voiceover: The fair value of a futures contract is the price of the contract at which a buyer of the stock would be neutral between buying it on in an actual stock exchange and actually buying the stock and agreeing to buy the futures contract. Or a seller of the stock would be neutral between selling it right now in the actual exchange versus agreeing to go short or agreeing to be on the selling side for a futures contract. The fair value attends to be quoted for the front month or the next expiring futures contract. Next expiring futures contract. To see how this works, why someone would be neutral between say, buying something now for a $100 and agreeing to buy it maybe next month at a $102, think of it this way. If they want to just hold that stock a month, or two, or three from now, they could pay a $100 right now or they could take their $100 so they could either just buy it right now or they could stick it maybe in the money market account. They could get some interest for the next few weeks and then they could buy the futures contract. If they got interest of $2, if they kept that $100 say in a money market account for the next, until the actual contract date for that futures contract they'd be neutral. I could spend a $100 today or I could put a $100 in a money market account, get $2 in interest and I'm not going to worry about the dividends right now. If a dividend happens then, obviously you would want to pay less for this thing where you didn't get the dividend. Assuming no dividends, you say well or I'd be willing to pay a $102 for that. If this was only a $101, if the price of the futures contract was a $101, then you say, "Wait, if the price of the futures contract is a $101," "I would rather put my money in a money market account, get $2 of interest." "And buy it in a month for a $101." I'll essentially get an extra dollar if I do that. If the price is at a $103, you say, "Well gee, if I want to hold that stock" "a month or two from now. I'm way better buying it right now." Or another way to think about it if the price is at a $103 and I'm a seller of the stock. Instead of selling it today for a $100, let's say I really need a $100 right now. I'm better off borrowing a $100 right now. Paying maybe $2 in interest and then selling it a month later for a $103. The fair value is the price which a buyer or seller is neutral between buying and selling the stock or entering into a futures contract. I'm going to go a little bit more detail in the next video but it's main use is an indicator of what's likely to happen once a market opens and that's because futures markets trade have much longer trading hours, sometimes 24 hours than traditional stock markets. If you could imagine, if the price of a futures contract is trading below its fair value, the only reason why that would happen is if a lot of people are actually expecting, once the market opens that the stock price is going to go down.