This theory starts with a premise that producers are scared of prices going down and hence there are more people ready to take short position. I would like to understand what if more consumers of commodity are scared of prices going up and hence there is more demand for long positions amongst the hedgers? Will the forward price be more than expected future spot price?
I'm still confused. Why is F0 higher than S0 if we are in normal backwardation? I thought normal backwardation assumes we are in a period of declining futures prices.
You have to see his previous videos - normal backwardation is not backwardation. You're right, the example he gives is a contango one, as he states at 2:42. If the futures price is less than the expected futures spot price it's called normal backwardation; and if the futures price is greater than the expected futures spot price, it's called normal contango. As he explains elsewhere, normal backwardation in theory always occurs because the discount rate "k" in his spreadsheet is always greater than the risk free rate "r" (so r-k is a negative number in his spreadsheet) regardless whether we have a backwardated or contango market.
This video really explains the theory good. However I have a question. Let's assume the commodity is silver. Why the speculator doesn't buy the commodity on the spot price of 10, but instead buys a future for 10.41?
As I understand the example, if the speculator buys the silver today at 10 and holds it for a year, he will incur carry costs so that when he sells at at 10.41, he would have made no money. The example he gives is at 10:10.
Hello @Linh Nguyen. This video was from 2009 so I'm sure that this mistake was already noticed. However, with that being said, David is one of the best FRM instructors out there. I know that many people would agree with that. He is only human and every human makes mistakes. Take a look at our newer videos. I'm sure you will find them very helpful. Thanks! - Nicole -
This is the best explanation I have seen on the topic.
OUTSTANDING!
This theory starts with a premise that producers are scared of prices going down and hence there are more people ready to take short position. I would like to understand what if more consumers of commodity are scared of prices going up and hence there is more demand for long positions amongst the hedgers? Will the forward price be more than expected future spot price?
really interesting, you make it so clear, thanks !
I'm still confused. Why is F0 higher than S0 if we are in normal backwardation? I thought normal backwardation assumes we are in a period of declining futures prices.
You have to see his previous videos - normal backwardation is not backwardation. You're right, the example he gives is a contango one, as he states at 2:42. If the futures price is less than the expected futures spot price it's called normal backwardation; and if the futures price is greater than the expected futures spot price, it's called normal contango. As he explains elsewhere, normal backwardation in theory always occurs because the discount rate "k" in his spreadsheet is always greater than the risk free rate "r" (so r-k is a negative number in his spreadsheet) regardless whether we have a backwardated or contango market.
This video really explains the theory good. However I have a question. Let's assume the commodity is silver. Why the speculator doesn't buy the commodity on the spot price of 10, but instead buys a future for 10.41?
As I understand the example, if the speculator buys the silver today at 10 and holds it for a year, he will incur carry costs so that when he sells at at 10.41, he would have made no money. The example he gives is at 10:10.
thankyou for sharing your knowledge!
this is so effing amazing video
Thank you for watching!
Thanks very much, I wish I watched this earlier
+DDZTDD You're welcome! Glad it was helpful!
thanks..clarifies well !
I am not sure if i trust an instructor that calls systematic risk as systemic risk.
Hello @Linh Nguyen. This video was from 2009 so I'm sure that this mistake was already noticed. However, with that being said, David is one of the best FRM instructors out there. I know that many people would agree with that. He is only human and every human makes mistakes. Take a look at our newer videos. I'm sure you will find them very helpful. Thanks! - Nicole -