Great video, but the quality was an issue. 360p is very low, could future videos be at least 720p upwards (1080 preferred) to at least be able to read the text on the spreadsheets.
can you help me with this? Question 2. (20 points) It is January 31, 2019. A local brewery is a large producer of craft beer whose main ingredient is barley. The demand for craft beer is seasonal with the largest demand occurring mid-June through the end of August. Production schedules require the acquisition of 80 metric tons (MT) of barley in late May to meet the summer season demand. The management of the brewery is concerned about the possibility that a rise in the price of barley between now and the end of May could hurt profit margin. Barley must be acquired for $350 per metric ton (MT) or less to ensure profitability. On February 1, 2021, the ICE June 2021 Barley futures contract (20 MT per contract) is selling for $351.80 per MT. The standard deviation of the change in the spot price of barley is 0.80. The standard deviation of the change in the futures price of barley is 0.56. The correlation between the change in futures price and the change in spot price is 0.60. One contract of barley is 20 metric tons on ICE. (a) Indicate whether the risk manager of the brewery should take a long or short futures position to hedge price risk. Why? (b) Calculate the risk-minimization hedge ratio, h, and determine how many contracts the brewery must trade? If the standard deviation of the change in the futures price of barley doubles, what would happen to the number of contracts? Does it increase or decrease? Explain the intuition behind your last result. (c) Determine the hedge effectiveness and comment. Determine and discuss the effects of the hedge effectiveness of (i) a 25% decline in the correlation between the changes in futures price and the change 3 in sport price, ρ, (i) a doubling of the standard deviation of the change in the spot price of barley, σs, and (iii) a doubling of the standard deviation of the change in the futures price of barley, σF? (a) Suppose that the brewery follows your hedging recommendations in (a) and (b). On June 1st, 2021, the spot price of barley is $400 per metric ton and the June barley futures price is trading at $410 per metric ton. What is the total gain or loss from the futures position(s)? What is the net (effective) price paid by the brewery? Any regrets from hedging? Why?
No...but (in my personal opinion) FAR, FAR too many people are using instruments that they don't fully understand and trading too frequently. I tell my students that I do not believe markets are truly efficient, but one of my favorite quotes is "It is absolutely possible to beat the market, just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates. It is so improbable, however, that it’s rendered a fruitless, if not counterproductive, pursuit." (timmaurer.com/2014/04/17/why-beating-the-market-is-an-uphill-skate/). Maybe a bit of an exaggeration, but probably not much. We hear the winners publicized far more than the losers (think of how many stories you read about the people who bought GameStop in the $300+ range), so think it is easier than it really is. Get rich slowly by (a) spending less than you make, (b) saving the difference in a tax-deferred account, (c) diversifying, (d) keeping costs (trading/expense ratios/taxes/etc) as low as possible and (e) planning on a 30-40 year investment horizon. Someone who saves $500 a month in an account that earns 8.5% over 40 years will have just over $2 million. Someone who saves $500 a month in an account that earns 8% over 30 years will have $745,000. Time IN the market>>>>Timing/Trading the market.
The market makers can also use other options to cover positions, they do not have to use shares, it's all part of the formula, along with increasing the volatility in order to make it more expensive for traders to continue to push the market up through option plays. GME was at a point so expensive to buy an option, that you were better off buying the stock directly....and since there was almost no supply for market makers, they weren't even on the ask side of the market until they were able to buy shares from someone....so the 'ask was a few times registering as $5,000, which were the WSB guys. It's funny that they call it a gamma squeeze, when it really is just a delta squeeze for neutrality, in that they have to hold inventory equal to their neutral position. The 2nd derivative is only a slope of the current position, still doesn't mean that's how many shares they are buying or selling at any given time. Plus, for an entire day on friday, the gamma was 0 for every option....which made absolutely no sense. Sometimes the greeks are used when making phrases, but they aren't necessarily used for it....and in this case, it definitely doesn't get used.
Thank you! I understood things way better after watching your videos. Really appreciate that!
Wow! Just checked out your videos. This channel is amazing! Thanks for everything
Appreciate the kind feedback!
Suggest uploading at least 1080p for better visual experience standard. Great video by the way!
Great video, but the quality was an issue. 360p is very low, could future videos be at least 720p upwards (1080 preferred) to at least be able to read the text on the spreadsheets.
can you help me with this?
Question 2. (20 points) It is January 31, 2019. A local brewery is a large producer of craft beer whose main
ingredient is barley. The demand for craft beer is seasonal with the largest demand occurring mid-June through
the end of August. Production schedules require the acquisition of 80 metric tons (MT) of barley in late May to
meet the summer season demand. The management of the brewery is concerned about the possibility that a rise
in the price of barley between now and the end of May could hurt profit margin. Barley must be acquired for
$350 per metric ton (MT) or less to ensure profitability. On February 1, 2021, the ICE June 2021 Barley futures
contract (20 MT per contract) is selling for $351.80 per MT. The standard deviation of the change in the spot
price of barley is 0.80. The standard deviation of the change in the futures price of barley is 0.56. The
correlation between the change in futures price and the change in spot price is 0.60. One contract of barley is 20
metric tons on ICE.
(a) Indicate whether the risk manager of the brewery should take a long or short futures position to hedge
price risk. Why?
(b) Calculate the risk-minimization hedge ratio, h, and determine how many contracts the brewery must
trade? If the standard deviation of the change in the futures price of barley doubles, what would happen
to the number of contracts? Does it increase or decrease? Explain the intuition behind your last result.
(c) Determine the hedge effectiveness and comment. Determine and discuss the effects of the hedge
effectiveness of (i) a 25% decline in the correlation between the changes in futures price and the change
3
in sport price, ρ, (i) a doubling of the standard deviation of the change in the spot price of barley, σs, and
(iii) a doubling of the standard deviation of the change in the futures price of barley, σF?
(a) Suppose that the brewery follows your hedging recommendations in (a) and (b). On June 1st, 2021, the
spot price of barley is $400 per metric ton and the June barley futures price is trading at $410 per metric
ton. What is the total gain or loss from the futures position(s)? What is the net (effective) price paid by
the brewery? Any regrets from hedging? Why?
Do you have to be an astrophysicist or a calculus major just to understand options/pricing, much less trade and profit off of them?
No...but (in my personal opinion) FAR, FAR too many people are using instruments that they don't fully understand and trading too frequently. I tell my students that I do not believe markets are truly efficient, but one of my favorite quotes is "It is absolutely possible to beat the market, just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates. It is so improbable, however, that it’s rendered a fruitless, if not counterproductive, pursuit." (timmaurer.com/2014/04/17/why-beating-the-market-is-an-uphill-skate/). Maybe a bit of an exaggeration, but probably not much. We hear the winners publicized far more than the losers (think of how many stories you read about the people who bought GameStop in the $300+ range), so think it is easier than it really is. Get rich slowly by (a) spending less than you make, (b) saving the difference in a tax-deferred account, (c) diversifying, (d) keeping costs (trading/expense ratios/taxes/etc) as low as possible and (e) planning on a 30-40 year investment horizon. Someone who saves $500 a month in an account that earns 8.5% over 40 years will have just over $2 million. Someone who saves $500 a month in an account that earns 8% over 30 years will have $745,000. Time IN the market>>>>Timing/Trading the market.
great video, blurry image btw
The market makers can also use other options to cover positions, they do not have to use shares, it's all part of the formula, along with increasing the volatility in order to make it more expensive for traders to continue to push the market up through option plays. GME was at a point so expensive to buy an option, that you were better off buying the stock directly....and since there was almost no supply for market makers, they weren't even on the ask side of the market until they were able to buy shares from someone....so the 'ask was a few times registering as $5,000, which were the WSB guys.
It's funny that they call it a gamma squeeze, when it really is just a delta squeeze for neutrality, in that they have to hold inventory equal to their neutral position. The 2nd derivative is only a slope of the current position, still doesn't mean that's how many shares they are buying or selling at any given time. Plus, for an entire day on friday, the gamma was 0 for every option....which made absolutely no sense. Sometimes the greeks are used when making phrases, but they aren't necessarily used for it....and in this case, it definitely doesn't get used.