Would this work

[Rognvald]

Why do we have the term convergence in futures?

Because:

"Convergence is The movement of the price of a futures Contract toward the price of the underlying Cash commodity. At the start, the contract price is higher because of time value. But as the contract nears expiration, and time value decreases, the Futures price and the Cash price converge. "

QED!

 

[Rognvald]

OK
Here's a good one!
http://www.investopedia.com/articles/03/082703.asp

With options you have an option that may exercised until expiry- with futures there is an obligation to deliver or receive

 

[bonsai]

wysi

if you still believe that, after the example I put up,
then I cant help you.


so I am signing off.

 

[frugi]

FTSEBeater,

Thus if you followed your plan of

Long FTSE futures March 2004
Short FTSE Futures Rolling cash bet

the March contract would be initially priced higher than the rolling cash (called "cost of carry"), with the prices converging over time. So anything you gained in interest on the short cash postion would be lost on the future price decay.

In fact, since steal4free pay a pathetic SONIA -2.5% on short cash postitions (though of course charge SONIA +1.5% for longs) I think you would actually lose out in total.

http://www.trade2win.co.uk/boards/showthread.php?s=&threadid=7475

Nice thought though!

 

[FTSE Beater]

Hi Frugi

I would agree if the prices were different, but for some reason (which I can't work out) the prices are practicially the same, maybe 1-2 points out

From the thread you listed it seems that 1 short FTSE contract would be £9.30 per day profit, if that was the case - trading 10 contracts would make a nice little earner for no work at all

 

[bonsai]

FB
as its you, I will try once more

futures expire next week
so put 7 days into my equation instead of 91

OK ?

 

[TBS]

Bonsai is of course quite right, futures do indeed hold a time value - however, as ever, it isn't simply a straight interest rate type calculation - there is also a deal of sentiment in there too.

Oh - and just to make things even more interesting - Mar futures are currently 5pts discount to cash.

If you really want to waste money doing this, you would be better off trying a commodity where the contract steps are practically sacrosanct as it can be the only thing that keeps the store holders in business - such a London wheat.

Basically, don't waste yr time.

 

[wysinawyg]

Sandy,

Bonsai is of course quite right, futures do indeed hold a time value - however, as ever, it isn't simply a straight interest rate type calculation - there is also a deal of sentiment in there too.

I know they have time value in the way that Bonsai has shown and as above (my first line in the thread was saying that they have the time value of money built in!!!). But that seems to me more the colloquial version of time value.

I thought time value had a basically different meaning in options trading as volatility is more directly priced into options than futures (as you can't safely just arb out differences between the underlying and an option in the same way as you can with the uderlying and and a future because the option could expire worthless). Am I completely wrong on this?

e.g.

http://www.riskglossary.com/articles/time_value_and_intrinsic_value.htm

http://www.asx.com.au/markets/l4/OptionsValued_AM4.shtm

and

http://www.liffe.com/liffeinvestor/introduction/how/products/individual/prices.htm

This all looks totally different to the concpet of time value for futures.

wysi

 

[BBB]

WYSI -

Yea, your about right.

Those who think futures have time value seem to mean the interest component or holding costs of futures. THIS IS NOT TIME VALUE!

FB - If you want to look at ideas for locking in (almost) guaranteed profit, then I suggest you look at Synthetic futures, using options.

This can be found in Sheldon Natenburgs excellent book Option Pricing and Volatility. This was the bible that EVERY options trader knew inside out when I was on the floor.

Folks - I really hope you take this to heart. I don't want to seem like a doomsayer here, but it is IMPERATIVE that you understand every aspect of any derivatives contract before you so much as enter an order. I saw a load of guys go bust on the floor, some losing their houses and having to declare them selves bankrupt because they didn't appreciate what they were getting into.

Please take heed. You owe it to yourselves.

 

[darrenf]

I think we are agreed that the furtures price is at a premium to the cash price, and that the difference reduces to converge with the cash price at expiry, hence "time value" exists in futures. However I think the correct term in futures is "cost of carry" as eluded to by frugi earlier in the thread?

The term "time value" technically is only relevant to options. ie time value and volatility being components of options pricing models.

FB

Haven't done the maths but I am pretty sure the chances of being on to a winner with this are slimmer than the proverbial nats blx

 

[FTSE Beater]

I think we are agreed that the furtures price is at a premium to the cash price, and that the difference reduces to converge with the cash price at expiry, hence "time value" exists in futures.

Noooooo This is where I disagree

I would agree if the price offered by the spreadbetters is the same for the futures contract as it is for the cash, but it's not - and this is the crunch point.

Put it this way. When you place a trade with the spreadbetters, they hedge the price off against the futures (I know there are some exception, but bare with me ), so that's why the cash is equivalent to the futures. The real cash value (outlined by Bonsai's table earlier) is probably no where near the futures price, but you can't trade the cash, because it doesn't exist. What you trade is a spreadbetting simulation of the cash.

Darrenf - your probably right, but my brain needs some exercise occasionally - just as Bonsai is thinking WELL THEN USE IT FB

Let's face it, the only way I'm going to find out if it works is try it one day and see. It's worth a couple of quid to find out if I'm wrong.

 

[TBS]

Hi wysi,

But that seems to me more the colloquial version of time value.

Apologies, quite right, it is not 'time value' in the true sense of a financial definition - as someone above points out, it is more akin to 'cost of carry'.

Either way I suspect it is currently - and probably always un-tradeable with a regard to making rather than losing money.

 

[bonsai]

ahem

I think you 'cost of carry guys' will find that for monetary instruments it includes dividends.

 

[wysinawyg]

ahem

I think you 'cost of carry guys' will find that for monetary instruments it includes dividends.

No disagreement there :-0



wysi

 

[BBB]

BUT - Does the idea work? Has anyone done this yet?