Would this work

[FTSE Beater]

Hi All

I've had a :idea: moment, and I can't quite work out if this would work

When you place a rollover cash bet with D4F, they charge or pay you interest overnight. If your long, you pay them and if your short, they pay you. The same doesn't apply to quarterly trades.

So my thinking is.

Long FTSE futures March 2004
Short FTSE Futures Rolling cash bet

The net result will be the same, as your trading the same instrument off 1 long contract vs 1 short contract. At the end of each day, D4F then pay for holding your short overnight.

This seems to good to be true - What have I missed

 

[bonsai]

psst
they also hit you for ex-div if you hold rolling cash !

 

[wysinawyg]

<i>This seems to good to be true - What have I missed</i>

I think I have this right, the futures have time value of money built into the price. As such you'd expect the value of the future to fall (all other things being equal) the closer they get to expiry.

So for example it might be 10 points above fair value at the start falling to 0 on expiry. The 10 points that it is above to start with should be more than D4F will pay you on the short bet over the course of the contract.

wysi

 

[bonsai]

er

if you ever see futures 10pts > fair value, you be sure to let us know, d'you hear ?
I'd like a piece of that

But I would be going to short it !

 

[wysinawyg]

OK fair value isn't the right word as, having just checked, fair value is essentially cash price + interest cost. The point is the same though in that there will be an in built bias upwards because of the interest element of the pricing at the start of the contract that will deteriorate towards expiry.

wysi

 

[bonsai]

but your scheme still needs you to sell the future and buy the cash. right ?

Fb's scheme wanted to long the future and short the cash

he is trying to win on the interest, you are trying to win on time value ? He seems to have forgotten he would lose on time value
and you havent taken interest into account ?

Suggest something is a bit sniffy in the State of Denmark ?

Why not start by calculating the interest you would be charged ?
Oh and for god's sake remember to close your cash at exactly the
very moment that futures expire ?

Also dont forget you will lose on the spread when you close your cash. probably lose something on the future as well but that's
a bit obscure.

 

[Rognvald]

:cheesy: :cheesy:

 

[wysinawyg]

<i>he is trying to win on the interest, you are trying to win on time value ? He seems to have forgotten he would lose on time value
and you havent taken interest into account ?</i>


We seem to be having a failure to communicate

I was saying Mark's plan won't work because of the interest/time value (same thing, time value is just what they call it in options isn't it?) that is included in their quarterly bets as it is in all future pricing.

I was not that it would work if you did it the other way round. I expect the savage difference between real interest rates and the rates you pay/are paid by spreadbet companies guarantee that you're never going to make money doing anything like this.

wysi

 

[bonsai]

yup

they werent born yesterday, that's for sure.

 

[FTSE Beater]

yup

they weren't born yesterday, that's for sure.

NOW YOU TELL ME!!!!

Thanks for the replies peeps.
<hr>

Hi bonsai

psst
they also hit you for ex-div if you hold rolling cash !

Not on a FTSE Contract....surely?

Oh and for god's sake remember to close your cash at exactly the very moment that futures expire ?

Why? You could close it anytime - couldn't you

Also dont forget you will lose on the spread when you close your cash. probably lose something on the future as well but that's
a bit obscure.

Maybe, but you don't have to close the 2 contracts at the same point. When you come to close it, just close the one that looks poor in the short-term and let the other one run :cheesy:

<hr>
Hi wysinawyg

I think I have this right, the futures have time value of money built into the price. As such you'd expect the value of the future to fall (all other things being equal) the closer they get to expiry.

ah. I knew this was the case for commodities and financial, but I'm not sure about index futures. Checking my FINS account, and that doesn't seem to be the case. The cash is about the same as the futures - only 1-3 points out

<hr>
Does anyone know what Finspreads or Deal4free pay you for holding overnight. I fancy looking into this a bit more

 

[options]

It'll be on the web sites probably under the terms and conditions bit.

Good luck. My head hurts from reading that lot.

Was your intention to hedge against a open position?

If I'm going for a swing, I try to leave the short to run, and hedge against any up move by jumping on the same contract. ???

Difference being that I use the same contract but 2 sb's.

 

[wysinawyg]

ah. I knew this was the case for commodities and financial, but I'm not sure about index futures. Checking my FINS account, and that doesn't seem to be the case. The cash is about the same as the futures - only 1-3 points out

Mark,

Definitely is the case for financial futures as the institutions can always arb out the difference by buying the underlying and selling the future (or vice versa) if it gets too far away.

Do have a look at it but its going to be strange as the cash is based on futures prices as well.

Thinking more on it, the other problem I expect you're going to have is that the rolling cash won't close out at the same price as the quarterly. You definitely need to make sure that on the day of expiry you can close out the cash and the future at the same price. If they let you do that then there clearly is some potential there, but I still doubt very much that when you work it out you'd get more than you would off of ING Direct

wysi

 

[bonsai]

Fb
1- yes. see T&C's
2-You will need to close both as the quotes are as tied together
as a donkey to its tail.
3- See 2

Both the futures and cash quotes are based on the Futures price.
normally the only difference is the fair value adjustment.
But they subtract fair value from the futures to arrive at their
cash quote. Which is the reverse of what you might normally think.


4-The interest rate varies from day to day. The basis is spelled out
in their T&C's.

 

[BBB]

FYI:

Futures DO NOT have 'time value'.

Options DO!

Time value or time decay as it is also known is the phenomena of an option decreasing in value as it approaches its expiration date. This is because volatility will evaporate (volatility is one of the main components in option pricing) as the option approaches expiry.

(interesting fact: 80% of options expire worthless!)

A futures contract may also experience a fall in volatility as it approaches expiration, as its price converges with the cash market for obvious reasons.

Neat idea though!

 

[bonsai]

Futures have no time value ?

that's novel

 

[wysinawyg]

Seems right to me.

Futures have to have an element of interest built in or else institutions would just arb out the difference between the underlying and the future.

Due to the optional nature of options you also get time value which is based on the volatility not interest rates. That's to represent the chances of whether or not the option will finish in the money, which is determined by its volatility and the time that volatility has to act.

I didn't think I'd heard time value used in the context of futures but couldn't quite think why it was options only.

wysi

 

[bonsai]

wysi

of course there is time value in futures !

its fundamental to the whole concept of any instrument which
expires on a predetermined date.

Can I suggest you check out your understanding of Fair Value ?

 

[Rognvald]

Perhaps one of the best ways of appreciating time value in futures is to look at the realities of commodities futures when there is a distinct possibility of a fleet of trucks arriving at your door on the nth December wanting to know where you want the x tons of grain or x hundreds of live hogs putting or if you like the telephone call asking when they are going to arrive?

Who pays for the storage/keep until then? Who pays the transport costs? Who pays the insurance? Who pays for the capital tied up? What profit will they make and how?

 

[bonsai]

here is an example for a 'money' contract.

bare bones stuff but hope it helps for you to get the picture.


Have to go, damned great Oil tanker has arrived and the driver
shouted " Where do you want it ?"

 

[wysinawyg]

No I'm positive of this now. If either of you can show me a definition of Time Value that says it applies to Futures I'm happy to agree, but Time Value is a term of art for Options.

I know Fair Value includes an adjustment for interest rates, but that isn't the same thing as Time Value in Options.