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Current time:0:00Total duration:3:48

Video transcript

let's verify that the margin mechanics and the marking to market of the futures contract actually gets both the seller and the buyer what they originally wanted which is that they don't have to be susceptible to the volatility in Apple prices they both wanted to effectively sell the apples for 20 cents a pound or buy the apples for 20 cents a pound and they didn't want to in the farmers case go out of business if they could only sell the apples for 10 cents a pound or in the pie company's case go out of business if they had to buy the apples for 30 cents a pound so let's verify that this works out so they originally had a contract price of $200 4,000 pounds so this is essentially 20 cents a pound 20 cents a pound and as we said in the previous video as the futures contract delivery price changes day by day as we get closer and closer to the actual delivery date what happens is is that we transfer money between the buyers margin account and the sellers margin account as the price of as the delivery price on the future contract goes down in order to mark the delivery price down so in order to mark it down from $200 to $190 to $185 this guy keeps getting a better deal on the actual delivery price so to make things fair he has to transfer the same amount of money to the margin account of the seller so let's imagine two scenarios let's say that eventually as we approach November 15th remember this is the delivery date the delivery the futures contract delivery price is going to approach the market price you can imagine right when we're like a second before the delivery date the futures contract and the market price aren't going to be that different and let's say that this goes let's say that this goes all the way down to $100 so in that whole process this futures contract keeps getting marked down to $100 so on that day it is true that the seller will sell a thousand pounds of apples to the buyer for only $100 so you might say hey wait what did the seller get out of this he's only getting 10 cents per pound for his apples this was what he feared he's susceptible to the volatility of the market prices but remember because of this marking the market and because of the the margin transfers here this delivery price went down from $200 to $100 there would have been a transfer from this guy's margin account to this guys margin account of of $100 so instead of just getting the hundred dollars for that thousand pounds of apples because this seller had this futures contract he would have also got another hundred dollars transferred into his margin account so his economic the true economic value he gets is two hundred dollars no matter what for his thousand pounds of apples or 20 cents a pound you can imagine the other scenario what if the delivery price is we get closer and closer to delivery date goes up if it goes to three hundred dollars three hundred dollars per thousand pounds well you might say hey the seller is going to get a bonanza and this guy's going to go out of business because he's going to be essentially paying 30 cents per pound but you got to remember if the price went up and this becomes and it becomes more and more favorable to the seller because of the margin mechanics the seller would have to transfer a hundred dollars over the as the price moves up to the buyer to his margin account and so even though this guy has to pay $300 per pound because that's where the market price eventually ended up he would get a hundred dollars from the seller so effectively he would still only have to pay $200 and even though this guy's selling it for $300 he actually had to pay another hundred dollars so net he's really only getting $200 for it so no matter how you look at it both parties are transacting at $200 or 20 cents a pound