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  2. Hi John,
    If a company is buying a future with an obligation to receive, say, 125,000 euros in 3 months time (in return for US $), and the end of the contract happens to coincide exactly with the date they want the euros, can they just let the contract crystallise and receive the euros from the counterparty? Or must they always just settle the gain/loss versus the prevailing spot and apply that against having to go to the cash market to buy the euros there? With an option you can exercise a right to buy and receive delivery of the underlying, I’m just not sure if you can do the same with a future. Thanks.

  5. please, im still confused about something. you keep saying you buy the future and sell the future. i understand the part where you buy the future and sell later. but how do u sell the future and buy later if uve not even bought it in the first place. its a real confusion for me.

    • To be honest (as I say in the lecture) it is really just gambling – you don’t really buy or sell anything.

      To try and help you, just suppose I think that the price of Mercedes cars is going to go down in the next few months.
      You want to buy one, and so I promise now to sell you one for $30,000 to be delivered to you in 3 months time. I do not have a car at the moment, but I wait three months and then buy one – so I can deliver it to you. If I am right and the price has fallen (to (say) $25,000, then I buy it for $25,000 and sell it to you for $30,000 and make a profit. Obviously I am taking a risk because the price in 3 months might have gone up. If it has gone up to $35,000 then I still have to buy one in 3 months time to be able to deliver to you. But I promised to sell it to you for $30,000, so then I have made a loss.

      I hope that helps a bit (but you have to appreciate that most of the dealings on the stock exchange and the currency exchanges are really gambling – people hoping to make a profit, but risking making a loss).

  6. Hi Sir,

    A question rearding paying margin for a futures. The note say that when we but or sell the futures, we will have to pay for a deposit. But is the deposit payment for the first time when you buy or sell? Or is it everytime when you buy or sell you have to pay a deposit? Since when you buy and you sell let say 1mil futures, isn’t it netted off against each other? In this case that I buy 1 mil and sell 1 mil at different date, do I have to pay 1 time margin or 2 times margin?

    • There will be a deposit required for every transaction with futures, to make sure that you are capable of paying any losses that might occur – it will be adjusted as prices change in order to keep making sure.
      In the exam you will not be expected to do calculations with regard to the margins – just be aware that they exist.

      • Hi Sir,

        Another question will be how do we finish the deal for future? must it be on the very last day? Or can we finish the deal earlier (eg. we buy on 10 Aug and sell on 20 Aug, does this count as finish the deal? Or does it mean that no matter how many times we buy and sell, we will have to wait for 30 Sep to finish the deal?

      • I do actually make it very clear in the lectures, that the big benefit of using futures is that you can close the deal at any time up to the very last day of the future.
        If you buy futures then you can sell at any time up until the last day of the future (at which time you have to sell if you have not already done so.)
        Similarly, if you sell futures then you can buy at any time up until the last day of the future.

      • Sir,

        Please pardon my stupidity, if i get it wrongly again.

        But does the future somewhat work like buying and selling of shares, just that futures had a due date which cannot wait forever while shares can.

      • Yes it is like buying and selling shares, except for two things:

        First, you can buy futures now and then sell later, or you can sell now and buy later (which you would do if you thought the price was going to fall).

        Second, there is the time limit in that you have to finish the deal by (at the latest) the last day of the future.

  7. gradually gradually i will get there… risk has always been appearing so i started reading last week but i have not been able to grasp a single concept.. thank God i have gotten the starting here..i pray it runs through till the end… thanks Sir…

  8. When calculating the number of contracts be it in futures or options, do we round down the figure e.g. 23.6 to 23 contracts, or we do the normal rounding off of 23.6 to 24 contracts?
    Your assistance will highly be appreciated.

    • It does not matter in the exam – I would always round to the nearest ( 24 in your example).
      Sometimes the examiner refunds up in his answers, and sometimes he rounds down – you will get full marks either way.

  9. I was thinking to myself this seems very much like gambling until you said it at the end of the lecture !! 馃檪

    Well, many people told me P4 is difficult, I didn’t feel the confusion until I reached the exchange rate chapters! The thing is that I did not concentrate on exchange rate at all when I was studying F9 because it was unlikely to come in the exam as calculations and I forcibly took the risk due to the lack of time, so now I have to pay my dues to pass p4 I guess! 馃榾

    Thank you!

    Maha

  13. This lecture was simply amazing for me, I was finding it hard to grasp the concept of futures. You explained it beautifully by comparing it to the Fwd exchange contracts and stock market… thank you, that was really very helpful 馃檪

      • Most welcome 馃檪 … I just wanted to ask one thing, why didn’t I see anything about lock in rate? I am a bit confused about that… thankyou 馃檪

      • I am going to record more about lock-in rates.

        For the moment, if you look at the examples in the revision notes for P4 (both currency futures and interest rate futures) you will find an explanation of lock-in rates.

      • Hi
        sir can u please clear this concept of lockin rates? i went through all the notes and got the formula but in the revision kit it seems like a different approach. i would be thankful if u clear this concept of LOCK IN RATES CALCULATION.

      • If the difference between the spot rate and the futures price (the basis) was to stay constant, then the net effect of converting at whatever spot happens to be together with the profit/loss on the futures would be as though the transaction was fixed at the current spot.

        However, the basis does not stay constant, but we can predict how it will change (by assuming that it falls linearly over the life of the future).

        So we can predict the net effect of converting at spot and profit/loss on futures. The net effect will be effectively as though we convert the transaction at the current spot rate +/- the change in the basis by the date of the transaction. (The spot and the futures price will get closer together, the + or – is whichever makes them closer together). This is the lock in rate.

        Alternatively (and this will give the same answer) the lock in rate is the current futures price +/- the basis at the date of the transaction.

      • 馃檪 thankss alot for the explanation! got the concept really well….but this is the doubt which is still there:
        LAMMER PLC june 2006…. the basis is 0.486 and current future is 1.8986….. lock in is 1.8986+0.00486= 1.9035
        my question is that how did this 0.486 change to 0.00486

      • ooohhhhh thesee hidden secrets 馃檨 i spent soo many hours thinking what it was!!!
        thanks again :-)! i will soon ask you some more questions on other topics that i have collected! hope to recieve such answers again :-)!

  16. I am unable to access the lecture videos! The error that i keep getting it this:
    Server not found: rtmpt://r.acca.opentuitioncom.netdna-cdn.com:80/play

    I am accessing the site behind a proxy, could this be the problem? Please help!

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