Errors Found in Study Materials P1.T3. Financial Markets & Products (OLD thread)

[lowhueyyi]

Hi @David Harper CFA FRM , it seems that there is a minor typo in the notes for hull chapter 2 page 24. The ending margin balance should be $15180 instead of $15860.

 

[David Harper CFA FRM]

Yes, thank you @lowhueyyi Absolutely true! @Nicole Seaman Minor typo in 5th bullet of page 24 of R19 Study Note (Hull Chapter 2: Mechanics of Futures Markets, OFOD 10th), it should read "15,180" to match final number of sixth row on previous page 23:

• The ending margin balance is $15,180 (=12000 + 4020 + 3780 - 4620) which tallies the initial margin levels plus the variation margins provided during the two margin calls less the cumulative loss

 

[danghara]

Hello David
There is a typo in video of exotic options

European call option= long-asset-or-nothing call + short cash-or-nothing call
European put option= long-cash-or-nothing put+ short asset-or-nothing put

 

[samuelfu9999]

The forum link for Q&A Q2 of R19 Study Notes (P.144 of Options, Futures & Other Derivatives Study Notes) is incorrect. It should be https://forum.bionicturtle.com/threads/l1-t3-180-lower-bounds-on-option-prices-hull.4606/#post-12168 instead of
https://forum.bionicturtle.com/thre...torsthat-impact-option-price.4601/#post-12163.

 

[tattoo]

'' In the second scenario, the producer is exposes to a future spot price decrease, such that the appropriate hedge is a short position in coffee futures contracts. In this case as the future sale price is not predetermined, the underlying exposure is effectively a short position such that the hedge instrument is a long position. ''

Concerning scenario 2, i need a little clarification on the difference between the appropriate hedge being short and the hedge instrument being long

Edit: So I found out that the last sentence this is a typo on the notes, so all's good

Hi david,

Is this already fixed or not? I'm a little confused whether to use a short position or long position in scenario 2.

 

[David Harper CFA FRM]

@tattoo Yes, that typo has been fixed (for a while I think); page 34 now reads as below. The second scenario is the classic (aka, typical) case of a commodity seller (e.g., farmer) who plans to sell in the future at the then-prevailing but currently unknown (unknowable) price, whose risk is therefore a price decline such that a hedge would be a short futures contract. The risk is a spot price decline, so the hedge is a short futures position. The easy part is what to call it: a hedge that employs a short position is a short hedge. Thanks,

"A key difference: is the future price predetermined? Consider a coffee producer who plans to sell 100 pounds of coffee on a future date under two different scenarios:

1. To a key customer, the coffee producer promises to sell 100 pounds, on a date one year in the future, at $3.00 per pound.
2. To a key customer, the coffee producer promises to sell 100 pounds, on a date one year in the future, at the future spot price (which is obviously unknown today)

If the coffee producer wants to hedge with coffee futures, the hedge differs depending on the scenario:

1. In the first scenario, the producer is exposed to a future spot price increase, such that the appropriate hedge is a long position in coffee futures contracts. Because the sales price of $3.00 is predetermined, the underlying exposure is effectively a short position, such that the hedge instrument is a long position to offset.
2. In the second scenario, the producer is exposed to a future spot price decrease, such that the appropriate hedge is a short position in coffee futures contracts. In this case as the future sale price is not predetermined, the underlying exposure is effectively a short position such that the hedge instrument is a long position."

 

[tattoo]

@tattoo Yes, that typo has been fixed (for a while I think); page 34 now reads as below. The second scenario is the classic (aka, typical) case of a commodity seller (e.g., farmer) who plans to sell in the future at the then-prevailing but currently unknown (unknowable) price, whose risk is therefore a price decline such that a hedge would be a short futures contract. The risk is a spot price decline, so the hedge is a short futures position. The easy part is what to call it: a hedge that employs a short position is a short hedge. Thanks,

Thank you. David. I understand a short position should be used in scenario 2. But, what's the meaning of the last sentence "the underlying exposure is effectively a short position such that the hedge instrument is a long position. "? I think it's the same with the last sentence of scenario 1. Does it still mean a short position should be used?

 

[David Harper CFA FRM]

HI @tattoo (cc @Nicole Seaman ) Oh geez, we did not properly fixed that paragraph, I apologize. Page 34 should read:

"If the coffee producer wants to hedge with coffee futures, the hedge differs depending on the scenario:

1. In the first scenario, the producer is exposed to a future spot price increase, such that the appropriate hedge is a long position in coffee futures contracts. Because the sales price of $3.00 is predetermined, the underlying exposure is effectively a short position, such that the hedge instrument is a long position to offset.
2. In the second scenario, the producer is exposed to a future spot price decrease, such that the appropriate hedge is a short position in coffee futures contracts. In this case as the future sale price is not predetermined, the underlying exposure is effectively a long position such that the hedge instrument is a short position."

So @tattoo It should read as above, because: the more typical scenario (#2) is the coffee producer who plans to sell in the future but has not contractual arrangement with those customers and will be selling at the future then-prevailing price. This underlying exposure is effectively long simply because it profits on an increase in the spot (left unhedged, the farmer hopes for higher future prices and to sell at those higher prices!). Again, sorry for the confusion on a topic where the language should be clear .... thanks!

PDF Fixed in v9

 

[tattoo]

Hi David. I see you just update the study note for R19.
In page 65 of R19-P1-T3:
It should be 18*24 5.8%, not 4.0%, right?



FIXED in v9.1

 

[tattoo]

• Another typo in page 72 of R19-P1-T3

• Page 38 of R19-P1-T3, there's no answer to question 708.2.
• And for question 4(also in this page), choice B should be clarified that this only applies in long position.

FIXED in v9.1

 

[tattoo]

In page 85 of R19-P1-T3:



I think it should be at time T in the highlighted rectangle, not time zero, because you cannot get CC interest at time zero.

In example 5.6 just below the chart, are these interest rates typo, or need some conversion?



FIXED in v9.1

 

[David Harper CFA FRM]

Hi @tattoo Yes, thank you so much, all of the above are required corrections. Thank you! cc @Nicole Seaman Please note in regard to the R19 Study Note:

• Page 37-38 (Question and corresponding Answers to Hull's Chapter 2): The Question labelled 708.2 actually should be drawn from 142.5 (see https://forum.bionicturtle.com/threads/l1-t3-142-key-features-of-a-futures-contract-hull.4370/ ) and labelled "1" (but the substance of the Answer is already correct, if the Question is 142.5).
  • Minor: although functionally irrelevant: the links to forum answers each contain superfluous (unnecessary) suffix-modifiers that do not send directly to the question, but rather to a subsequent post; e.g. "#post-29142"
• Page 65 (start of). As @tattoo correctly notes, should read (emphasis mine): "Valuation of an FRA: Here we assume an FRA’s with a fixed rate of 5.80% for a six-month period starting in 18 months; i.e., FRA(18,24) = 5.8%, or FRA(1.5,2.0) = 5.8%, or 18 × 24 5.8%."
• Page 72 (third bullet): as above, should instead read (emphasis mine, here only): "The change in bond price is added to the initial bond price to obtain the new bond price of $93.96343 (= 94.213 - 0.2496) as predicted by the duration and convexity relationship."
• Page 85 ("Calculate a forward foreign exchange rate using the interest rate parity relationship")
  • Tattoo is correct about the upper-left box in Fig 5.1, it should read: "1000*exp(rf*T) units of foreign currency at time T"
  • Hull's Example 5.6 should read: "Example 5.6: Suppose that the 2-year interest rates in Australia and the United States are 3.0% and 1.0%, respectively, and the spot exchange rate is 0.9800 USD per AUD. According to the interest rate parity (IRP) relationship, the 2-year forward exchange rate should be: ..." Then the displayed formula is correct, as shown.

ALL FIXED in v9.1

 

[tattoo]

Hello David, thank you so much for your timely reply. One missing point:
For choice c) of question 4 in page 37 of R19-P1-T3, should it clarify that this only applies to a long position ?

 

[David Harper CFA FRM]

Hi @tattoo Yes, you are correct about question 4 on page 37 of R19 (cc @Nicole Seaman ): it had already been spotted and fixed in the source (see https://forum.bionicturtle.com/threads/l1-t3-147-normal-versus-inverted-futures-market-hull.4396/ ) i.e.,

147.3 Which of the following is TRUE about a normal/inverted futures market?

a. A futures market is either normal or inverted but cannot be a mixture
b. The roll return (roll yield) is profitable to a long position during an inverted (backwardation) futures market
c. A falling futures price necessarily implies backwardation
d. Gold must always be a normal market (assuming positive interest rates) because it has storage cost but does not pay a dividend

... but we did neglect to update the "copied" version in the Study Notes. Apologies. But again, THANK YOU sincerely for the help catching mistakes!

 

[Nicole Seaman]

Hi @tattoo Yes, you are correct about question 4 on page 37 of R19 (cc @Nicole Seaman ): it had already been spotted and fixed in the source (see https://forum.bionicturtle.com/threads/l1-t3-147-normal-versus-inverted-futures-market-hull.4396/ ) i.e.,

... but we did neglect to update the "copied" version in the Study Notes. Apologies. But again, THANK YOU sincerely for the help catching mistakes!

@David Harper CFA FRM This appears in the study notes exactly as you have it written in your comment above. Unless I'm missing something, it looks like it matches the source.

 

[David Harper CFA FRM]

@Nicole Seaman The difference is "to a long position" in choice (b): "b. The roll return (roll yield) is profitable to a long position during an inverted (backwardation) futures market" .... most people haven't noticed! Thank you,

 

[Nicole Seaman]

@Nicole Seaman The difference is "to a long position" in choice (b): "b. The roll return (roll yield) is profitable to a long position during an inverted (backwardation) futures market" .... most people haven't noticed! Thank you,

@David Harper CFA FRM

Thank you! I should have looked closer . I just looked at choice c because that is what tattoo had mentioned in his post.

Hello David, thank you so much for your timely reply. One missing point:
For choice c) of question 4 in page 37 of R19-P1-T3, should it clarify that this only applies to a long position ?

 

[tattoo]

Hi David
There're some deviation of the question 4 of page 153 in R19-P1-T3 from 182.5 which is listed in https://forum.bionicturtle.com/thre...dividends-on-put-call-parity.4616/#post-12194.

 

[JamesVU2000]

This is from Tuckman chapter one study notes. Should this be 100x(1+(.0125/2)?

$100.55 = (0.5)[$100 + (1.25%/2)] → (0.5) = 0.99925

 

[Elizabeth_Babalola]

Hi @David Harper CFA FRM ,

Trust you are keeping safe.

I found this on pg 19 of chapter 16 and it took me a while to get the answer using my calculator. Can i suggest that the denominator reads: 1+ (Rf* (T2 - T1)) instead