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Dear, Mr Moffat.
I understand the whole concept of using this means to act as a derivate and comfortable with the computation
However one thing is bugging regarding the workings of it in real life. As in stepping in wall street to trade. Allow me to explain
When we need to borrow. We sell futures now. How can we sell something now that we never bought in the first place.
Could you please shed light on this. How is this exactly executed.
As I explain in my free lectures, with futures you are not buying or selling anything physical – you are effectively making a gamble with the dealer. If you tell the dealer ‘buy’ then if the price goes up then the dealer pays you and if it goes down then you pay the dealer. If you tell the dealer ‘sell’ then if the price goes down the dealer pays you and if it goes up you pay the dealer. The dealers keep adjusting the price to keep things in balance (and to make sure they make a profit).
Even with physical things such as shares, you can sell first and buy later. However with shares, if you sell first then effectively you are borrowing shares for others to be able to sell them.
Hi Mr Moffat
Thank you for your lectures I have found them very useful.
I’m struggling a little to get my head around Interest rate hedging. I understand that with currency options it depends on whether you’re buying or selling the contract currency, With interest rate options I have been thinking of it as.. if you’re borrowing money and worried the interest rate will go up, you will buy put options because the futures will go down if the interest rate goes up therefore you sell now and buy later at a profit if interest rates go up? is this the correct way of thinking?Thank you Mr Moffat for taking the time out to explain even though u could have suggested me to rewatch the lecture and keep my ears open for it. Truly grateful.
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