Forward and Future delta

[Unusualskill]

Hi @David Harper CFA FRM @Nicole Seaman ,

I am reading Hull- Chapter 19 Assigned Reading.

May I ask why Forward delta is 1 but futures delta is not 1?

Since from my understanding, both can be priced using F_0=S_0*e^rT, differentiating with respect to S_0 should get e^rT?

Thank you!

 

[Nicole Seaman]

Hi @David Harper CFA FRM @Nicole Seaman ,

I am reading Hull- Chapter 19 Assigned Reading.

May I ask why Forward delta is 1 but futures delta is not 1?

Since from my understanding, both can be priced using F_0=S_0*e^rT, differentiating with respect to S_0 should get e^rT?

Thank you!

@Unusualskill

I just wanted to make sure you you have seen this thread in the forum, which seems to discuss the same question (I used the search function to look for similar discussions): https://forum.bionicturtle.com/threads/delta-of-futures-and-forward.1615/#post-5739. I'm not sure that it will completely answer your questions , but David provided a good explanation in that thread. I'm sure if your question is not answered in that thread David will be happy to help out more.

Nicole

 

[David Harper CFA FRM]

Thank you @Nicole Seaman This also came up last week (I mentioned it in the WIR https://forum.bionicturtle.com/threads/week-in-risk-november-5th.12293/ ) i.e.,

Hi @sm@23 I've struggled with this in the past; e,g, here is a nine-year old thread where I am not sure that I make any sense https://forum.bionicturtle.com/threads/delta-of-forward-and-future.336/

But i wonder why i've never considered this simply, where Hull distinguished between forward value and futures price

• the value of a forward contract, f = [F(0) - K]*exp(-rt) where F(0) = S(0)*exp(rT) such that f = [S(0)*exp(rT) - K]*exp(-rt) = 1.0*S(0) - K*exp(-rT) and ∂f/∂S = 1.0; ie, K is constant
• the price of a futures contract per cost of carry, F(0) = S*exp(rT) where ∂f/∂S = exp(rT).

I think given time I could actually connect this to the fundamental narrative explanation for the difference (which is that the futures contract settles daily which creates cash in-flow/outflow at the margin--literally via the margin account), along the lines of: the forward contract future value is discounted back, which negates the risk free growth; but the futures contract price is immediately responsive to riskfree rate changes, or put another way, unlike the forward math, effectively it is not getting nullified by not being discounted back, which is economically similar to investing now at that risk free rate (and earning the gain). My phrasing could stand much improvement, hopefully this makes a bit of sense ... thanks,

 

[Unusualskill]

@Nicole Seaman @David Harper CFA FRM Hi, one extra question, apart from the practice exam from GARP, which resources do you think have very similar questions types? Thank you!

 

[David Harper CFA FRM]

Hi @Unusualskill We try to make our PQs at least as hard (or harder) than the exam. GARP's practice exams are actually okay but they are repetitive (re-used) so it's still a relatively narrow scope in comparison to the total testable syllabus. Personally, I just don't spend any time on other resources, so I'm simply uninformed with respect to good sources. It's no secret that I do respect Kaplan Schweser, fwiw .... I'm confident their mocks are good, because they've been training the exam for a long time like us (with a robust feedback cycle) although I really don't look at them. I hope that is helpful!