I am very confused by the entire short call/ long call/ short put/ long put story.
I am also when one is used and when the other.
For instance going long call (sell the option to buy) helps if you expect your asset to decrease (or your liability to increase). But then again so does a short put (buy the option to sell). So when would you use one and when the other? Same story with short call and long put.
Also why would anyone go long put when they are facing unlimited risk, but only limited gain? I guess that the concept of selling the right to sell an asset you don’t have to hedge a completely different transaction may be confusing to several persons 馃槢
Perhaps this is the wrong place to ask the question, but not sure where to include it. Thanks in advance John and thank you for your great lectures!
In future you must ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.
‘Short’ dealings in anything are when you are selling an asset now with the intention of buying back later (so expecting the price to fall). ‘Long’ dealings are buying an asset now with the intention of selling later (so expecting the price to rise).
The idea of selling an asset that you do not have may be a confusing concept, but it is explained in earlier lectures in full (and in Paper PM (old F9) lectures as well).
As far as unlimited risk is concerned, the financial manager is only ever using futures, options etc. to hedge against the existing risk of a transaction. The risk of the futures. options deal ‘cancels’ the risk on the transaction.
I hope that you have been watching the lectures in order, and not just watching ones at random 馃檪
Thanks for the reply! I have been watching the lectures several times actually 馃檪 I will re-watch and in case I am unclear I will open discussion in the forum.
Effectively yes, but for interest rate options (and foreign currency options) you cannot be asked to calculate the premiums – they will be given in the question.
For interest rate futures and interest rate options on futures, we always take 3/12 (unless you are using ticks, in which case the tick value already takes account of the 3/12 – but there is never any need to use ticks).
If you are referring to specific past questions then ask in the Ask the Tutor Forum and I will explain the particular question.
While I know that this is not the place I must still comment and personally thank you Mr. Moffat. I just became an affiliate, with 0 fails and I think that you, sir, are a wonderful lecturer and I have gained a lot from your lectures. Please know that your work is duly appreciated. All the best.
You can either buy now at 96 (and then sell later, and if the price has gone up you make a profit), or you can sell now at 96 (and then buy later, and if the price has gone down you end up making a profit).
When they say ” BUY” the right to buy/sell futures at a fix rate for example 96, is it that given the type of transaction you can buy at 96 or sell at 96? or its only one of both?
@ Sir John, Thank you for great lecture. I want to ask about Futures price. e.g if you say futures price is 92, 1)is this amount in $ or cents? & that 92 is per contract? (e.g i want to buy two future contracts of $1m at exercise price of 92 each) 2)what will be the difference if i am borrowing in currency other than dollars say yen, does futures price will be derived from the same formula (100 – x%)? 3) Why we always sell futures when we are borrowing and buy futures when depositing? i like to understand the logic behind this? Thank you once again!
A future price of 92 is not in any currency – it is just another way of quoting 8% interest (100 – 8), and if you borrow money and are quoted a rate of interest then the % itself is not in any currency.
The whole purpose of using futures (as with foreign currency futures as well) is for the gain or loss on the futures deal to ‘cancel’ out the loss of gain on the transaction itself. If you are borrowing money and the interest goes up, then you are losing out on the loan itself. However if the interest rate goes up, the futures price will fall. So you will make a compensating gain on the futures by selling now, and then buying back later when the price is lower. Vice versa if you are depositing money.
Thank you Sir, can we also open our position by buying futures instead of selling futures when borrowing or it has to be selling futures first and buying later to close the position?
You can do, but it would be stupid thing to do! Because if interest rate go up you would be paying more interest on the borrowing, and at the same time you would make a loss on the futures. The whole point in trading in futures is for the gain or loss on them to ‘cancel’ the gain or loss on the borrowing itself.
(I am not sure why you have posted a comment about futures under a lecture on options)
John you are an amazing gifted tutor you make it all sound very easy, hope in will be both in practice and exam God Bless You am confident for a victory many thanks.
Global Pilot paper – from June 2013 exams Question 2 – Alecto Co.
In the solution, when calculating the profit/loss of the futures deals for both interest rate futures and options on interest rate futures, the calculation was not divided by 400 as explained by the tutor here, can you please explain why this was the case? Thanks
annchen says
I am very confused by the entire short call/ long call/ short put/ long put story.
I am also when one is used and when the other.
For instance going long call (sell the option to buy) helps if you expect your asset to decrease (or your liability to increase). But then again so does a short put (buy the option to sell). So when would you use one and when the other? Same story with short call and long put.
Also why would anyone go long put when they are facing unlimited risk, but only limited gain? I guess that the concept of selling the right to sell an asset you don’t have to hedge a completely different transaction may be confusing to several persons 馃槢
Perhaps this is the wrong place to ask the question, but not sure where to include it. Thanks in advance John and thank you for your great lectures!
John Moffat says
In future you must ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.
‘Short’ dealings in anything are when you are selling an asset now with the intention of buying back later (so expecting the price to fall). ‘Long’ dealings are buying an asset now with the intention of selling later (so expecting the price to rise).
The idea of selling an asset that you do not have may be a confusing concept, but it is explained in earlier lectures in full (and in Paper PM (old F9) lectures as well).
As far as unlimited risk is concerned, the financial manager is only ever using futures, options etc. to hedge against the existing risk of a transaction. The risk of the futures. options deal ‘cancels’ the risk on the transaction.
I hope that you have been watching the lectures in order, and not just watching ones at random 馃檪
annchen says
Thanks for the reply!
I have been watching the lectures several times actually 馃檪
I will re-watch and in case I am unclear I will open discussion in the forum.
John Moffat says
OK 馃檪
Lilit says
Dear John,
Are the values in columns the ones we have been calculating using the black Scholes Model ???
John Moffat says
Effectively yes, but for interest rate options (and foreign currency options) you cannot be asked to calculate the premiums – they will be given in the question.
daratito says
Gain/profit on option, should we take 3/12 or not?
and Premium should we take 3/12 or not?
as I found some take 3/12 and some not!
Could please explain?
John Moffat says
For interest rate futures and interest rate options on futures, we always take 3/12 (unless you are using ticks, in which case the tick value already takes account of the 3/12 – but there is never any need to use ticks).
If you are referring to specific past questions then ask in the Ask the Tutor Forum and I will explain the particular question.
daratito says
Thanks Mr. Professor!
John Moffat says
You are welcome 馃檪
Keta says
While I know that this is not the place I must still comment and personally thank you Mr. Moffat. I just became an affiliate, with 0 fails and I think that you, sir, are a wonderful lecturer and I have gained a lot from your lectures. Please know that your work is duly appreciated. All the best.
zanelen says
I have tried this lecture , I am not winning . But thanks anyway sir, I will keep on trying.
opentuition_team says
try another browser, like google chrome
kellyanbatchu says
Thats is you have to the option to either by at 96 or sell at 96?
John Moffat says
You can either buy now at 96 (and then sell later, and if the price has gone up you make a profit), or you can sell now at 96 (and then buy later, and if the price has gone down you end up making a profit).
kellyanbatchu says
When they say ” BUY” the right to buy/sell futures at a fix rate for example 96, is it that given the type of transaction you can buy at 96 or sell at 96? or its only one of both?
saan says
@ Sir John, Thank you for great lecture.
I want to ask about Futures price. e.g if you say futures price is 92,
1)is this amount in $ or cents? & that 92 is per contract? (e.g i want to buy two future contracts of $1m at exercise price of 92 each)
2)what will be the difference if i am borrowing in currency other than dollars say yen, does futures price will be derived from the same formula (100 – x%)?
3) Why we always sell futures when we are borrowing and buy futures when depositing? i like to understand the logic behind this?
Thank you once again!
John Moffat says
A future price of 92 is not in any currency – it is just another way of quoting 8% interest (100 – 8), and if you borrow money and are quoted a rate of interest then the % itself is not in any currency.
The whole purpose of using futures (as with foreign currency futures as well) is for the gain or loss on the futures deal to ‘cancel’ out the loss of gain on the transaction itself.
If you are borrowing money and the interest goes up, then you are losing out on the loan itself. However if the interest rate goes up, the futures price will fall. So you will make a compensating gain on the futures by selling now, and then buying back later when the price is lower. Vice versa if you are depositing money.
saan says
Thank you Sir,
can we also open our position by buying futures instead of selling futures when borrowing or it has to be selling futures first and buying later to close the position?
John Moffat says
You can do, but it would be stupid thing to do! Because if interest rate go up you would be paying more interest on the borrowing, and at the same time you would make a loss on the futures.
The whole point in trading in futures is for the gain or loss on them to ‘cancel’ the gain or loss on the borrowing itself.
(I am not sure why you have posted a comment about futures under a lecture on options)
saan says
Okay now i got it, thanks very much.
Oh that is a mistake on my part. My apologies 馃槈
Fatma says
Are caps long term in nature?
John Moffat says
No – they are more likely to be short term.
mmariba2000 says
John you are an amazing gifted tutor you make it all sound very easy, hope in will be both in practice and exam God Bless You am confident for a victory many thanks.
lakeside says
Please can someone help me?
From the Link below
https://www.accaglobal.com/en/student/acca-qual-student-journey/qual-resource/acca-qualification/p4/past-exam-papers.html
Global Pilot paper – from June 2013 exams
Question 2 – Alecto Co.
In the solution, when calculating the profit/loss of the futures deals for both interest rate futures and options on interest rate futures, the calculation was not divided by 400 as explained by the tutor here, can you please explain why this was the case?
Thanks
John Moffat says
The answer has used ticks, where the 400 has already been taken into account. You do not need to use ticks, but it gives the same answer either way.
One tick is a change of 0.01, so the profit or loss on one contract changing by 0.01 is 1M x 0.01 / 400 = $25
lakeside says
Many thanks
rmracca says
Thanks a lot :).
Khalid says
Very clear and concise. Thank you so much 馃檪
deepmaharaj says
Very nice. God bless
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yemisialese says
thanks OT