Financial Futures Payoff Diagrams

Financial Futures Payoff DiagramsIn This Video we look at the payoff diagrams of being long and short futures contracts and how this might differ from being long and short the underlying. We learn a bit about how an investor shorts a given underlying and why it might be more efficient to short a futures contract.In later videos we will learn about options payoff diagrams, in order to understand those diagrams it is important to understand what is being said in these much simpler diagrams.These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link. https://amzn.to/2WIoAL0 Check out our website http://www.onfinance.org/Follow Patrick on twitter here: https://twitter.com/PatrickEBoyleA futures contract is a standardized contract between two parties, to trade an asset at a specified price at a specified future date. The seller will deliver the underlying and the buyer will take delivery of the underlying and pay the agreed-upon price. The price that is agreed on is known as the future price or the delivery price and is determined when the contract is entered into. Since the price of the future is dependent on the price of the asset, this is a derivative instrument.A futures contract is very similar to a forward contract. However, the futures market evolved to reduce the illiquidity and counter-party risk of forward contracts. A clearing house acts as the middleman, which performs the trade with both the buyer and seller. Clearinghouses overcome the potential credit risk by requiring the participants to put up an initial amount of cash, known as the initial margin. Futures positions are marked to market, and if there are insufficient funds, the exchange will require an additional maintenance margin, or is allowed to immediately liquidate the position. Learn more about your ad choices. Visit megaphone.fm/adchoices