ARE139: Lecture 11, Fall 2015

Lecture 18 covers hedging using options and compares the benefits of hedging using options versus hedging using futures. Examples of hedging using options are presented.

Lecture 17 introduces the concept of put-call parity and its implications for options pricing. Arbitrage relationships between options contracts are discussed.

Lecture 16 Options on futures are introduced and options terms such as put, call, strike price, premium, and intrinsic value and time value are defined.  Numerous examples of options trades are presented.

Lecture 15: Carter continues the discussion of hedging, giving examples of currency and financial hedges. The concept of an optimal hedge is discussed.

Lecture 14: Carter introduces hedging with futures as a risk management strategy. He gives examples of long and short hedges in commodity markets are presented. Basis is defined as the difference between futures and cash prices and the implications of basis risk are discussed. Hedging is categorized as arbitrage, operational, or anticipatory.

Lecture 13 introduces two basic techniques for futures price forecasting: fundamental analysis and technical analysis. Carter gives examples of fundamental analysis, such as purchasing-power parity in currency markets are presented.

Lecture 12 begins with a description of Eurodollar futures contracts including calculation of profit or loss on and example contract. Professor Carter further discusses trade imbalance, politics, and international currency markets and valuation. He describes interest rate differentials and parity using the difference in U.S. and Canadian dollar values and interest rates. Interest rates, bonds and the cost of carry market.

Lecture 11 outlines the three types of financial futures and how they are priced. Professor Carter describes the characteristics of different debt instruments, bonds and eurodollars. The role of interest rates in debt instrument markets. He answers why financial futures have become so popular and how to read yield curves.

Lecture 10 presents the Theory of Normal Backwardation (Keynes) and the Theory of Price of Storage (Working) - explain how the prices for different delivery months are related and, in turn, the relationship to the spot price.

Lecture 9 completes the discussion of the price of storage and provides an example of actual basis for Illinois corn. Carter introduces foreign currency markets, how economic indicators impact currencies and interest rates. He talks about which economic variables affect currency prices.