Sal on Dylan Ratigan show

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Kind: captions
Language: en

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Dylan: Alright welcome back.

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A little new idea for you here
and this one applies to learning

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and most certainly would threaten to turn

00:00:08.603 --> 00:00:10.563
our current educational
system on its head.

00:00:10.563 --> 00:00:13.184
What's unclear is whether
it's good for America.

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A California school called the
Khan Academy is reinventing
traditional teaching

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by giving students lectures that they
can watch at home on their own time,

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re-watch them if they'd like and
then having them do the homework

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when they're in school in the classroom.

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Salman: By removing the one size
fits all lecture from the classroom

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and letting students have
a self pace lecture at home

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and then when you go to the
classroom, letting them do work,

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having the teacher walk
around, having the peers

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actually be able to interact with
each other, these teachers have used

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technology to humanize the classroom.

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Dylan: Well the founder, Salman
Khan, started out by posting lessons

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for his cousin on YouTube
and now the Khan Academy

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has over a million
unique students per month

00:01:00.158 --> 00:01:03.667
and boasts more than 2,000
tutorials covering everything

00:01:03.667 --> 00:01:08.819
from basic addition and subtraction to
advanced calculus, physics and chemistry

00:01:08.819 --> 00:01:12.274
and joining us now is Ben
Goldhirsh, the CEO of GOOD,

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it's a company dedicated to moving
the world forward through its website,

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magazine, videos and events.

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He thought that Khan was one of
the breakout stars at this year's

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Technology and Entertainment
and Design conference.

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Before we get to all this
Khan Academy business Ben,

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do you like it better when
we're on opposite coasts

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or would you be comfortable if
I was to move out to California

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to spend more time with you?

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Ben: I would love to have you out here
Dylan, I think we do better in person.

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Dylan: And do you feel
that you speak on behalf

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of the entire southern
California community when

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you welcome me into that universe?

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Ben: The thoughtful ones.

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Dylan: (laughs) Okay the thoughtful ones.

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We won't get into how many thoughtful
ones there are but we will get into this.

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Why did you decide to feature
this so prominently with GOOD?

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Ben: For the past two years,
GOOD and University of Phoenix

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have been focusing on solutions in this
education space and we haven't seen

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anything like it and to contextualize the
findings for you, look at Los Angeles.

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We have Teach for America, we have
City Year, we have KIPP Academy.

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The best of the best of social innovators
but they're facing a serious problem.

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600,000 students in LAUSD with
a 50 percent graduation rate.

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That's terrifying and the
bottom line is the solutions

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that we have on the ground, in my opinion,
aren't going to catch this problem.

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We need a disruptive technology,

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we need to really revolutionize
how we're tackling this.

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Khan Academy is the first thing I've seen

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that gives me confidence that
we're going to tackle it.

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It's the most exciting thing I've
seen that we're doing to do this

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so I'm pleased to bring it to your show,

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I think we're going to dig
into a good conversation.

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Dylan: Alright let's have at it.

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The man behind the idea
joins us, Salman Khan.

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Founder of the Khan Academy.

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High praise for what you've got going

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from our friend Ben down
there in southern California.

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He's a thoughtful southern Californian,
is how he likes to refer to himself.

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What have you found is the
biggest problem with this?

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What is the greatest barrier, the
greatest resistance point to this?

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Salman: Well I think that one,
it's such a radical change

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to what traditionally
happens in a classroom.

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If you're telling someone to
do homework in the classroom,

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it's not called homework anymore.

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But I think once teachers
and students get used to it,

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it's kind of like they start to
think about they even did before.

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Probably the biggest problem,
I wouldn't call it a problem

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it's actually a great thing, in
the same classrooms we have a pilot

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over here in northern California
where you have a 5th grade classroom,

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this is their math curriculum, and
that same 5th grade classroom there are

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some kids doing 3rd grade math and
there are some kids doing trigonometry

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and the teacher needs to
feel comfortable with that.

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But what's cool about it is that
they're getting a dashboard,

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they see where everyone is and every
student can work at their own pace.

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Dylan: If you were to look, Ben,
at the problem of having different,

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same age, but at different places, right?

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That's the whole thing with the
educational system is you got one kid

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doing trigonometry and another
one who's trailing behind.

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How do you see this, what did you see
about this, that you felt not only

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addressed the drop out rate but addressed
the variability of how people learn?

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Ben: I mean if you look at decreasing
budgets and increasing class sizes,

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we need to solve the efficiency problem
and teacher's time is a limited amount.

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So having this technology where they
can evaluate on a person-by-person basis

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where their kids are at and they can
have their classroom time to work

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with their kids who are at
different levels directly

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so they can be taking the lectures
at home through Khan Academy,

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that's a big solution
to a critical problem.

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Dylan: Salman walk me through
very briefly how this works.

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Let's say I've got a couple of kids,
they're in a traditional environment,

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I'm intrigued by what your
saying, how would it work?

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Salman: So every student
works at their own pace.

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They literally do exercises at their
own pace, they start at one plus one

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and they keep moving up all the way
through algebra or trigonometry,

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however far they want to go.

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If they have trouble with
anything the videos are there,

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they can actually watch them
at home or in class time

00:05:03.219 --> 00:05:05.939
and the teacher when they come to
class, they don't give lectures,

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they don't grade homework,
they don't give exams.

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They literally just get
a dashboard and they see

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where every kid in the class
is and some kids may be ahead

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and some kids might be behind.

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And we actually see them flipping
around, some of the kids that were behind

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race ahead later on and all the teacher
does is look at the kids who are stuck,

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look at the kids where the video and
the software isn't enough for them

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to get past that problem and then the
teacher just intervenes on those kids

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or even better, gets one of the kids that
are already proficient on that module,

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because they have all of the data
to actually tutor their peers.

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So you can have a class where
everyone's working at their own pace.

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Dylan: Got it, you say that
instead of penalizing failure

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and rewarding test taking ability like
our current system does right now,

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education should encourage failure and
experimentation but demand mastery.

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Why do you think this model achieves that?

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Salman: Well what we do is we force...

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In a traditional model, I'll give you
some lectures, homework, lectures,

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homework and then we have a snapshot
exam and regardless of whether you get

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a 70 or 80 or 90 percent on that
exam, we move onto the next concept

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and no one ever asks what was
that 10 percent you didn't know.

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And so what we see happening in our
school system is by the time people

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get to 8th or 9th grade, they're
taking algebra, they're smart kids,

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they have a great algebra teacher,
but they're still flunking algebra

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because they have that 10
percent gap from 5th grade math,

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that 15 percent gap from 4th grade math.

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So the way we're doing it is
we're actually teaching math

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the way you would teach anything else.

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If you learned to ride a bicycle
you would stay on that bicycle

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until you master the bicycle
before you try a motorcycle

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or a unicycle or anything more advanced.

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So what we're doing is we're making sure
every kid has all of their gaps filled.

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So they literally start at one plus
one equals two and they don't move on

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until they have 100 percent mastery.

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Dylan: Very quickly, Ben, what do you
see is the barrier to scaling this?

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Ben: I think it's money, getting
Khan Academy the resources they need

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to fill out their programming
and then getting school districts

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to adopt a pretty innovative solution.

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I think teachers are going to want this,
it's going to help them do their job

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and I think given what we're facing, as
I said 50 percent of a 600,000 person

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school district is looking to
not graduate from high school,

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there aren't more jobs for
high school dropouts right now.

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This must be adopted.

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Dylan: Listen I wholeheartedly
agree and I thank you Ben Goldhirsh

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as America's thoughtful southern
Californian for bringing that

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to our attention and Salman it's
a true pleasure to meet you,

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congratulations on what you've
achieved up to this point

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and do let us know what we can
help you with in the future.

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Check out all of it, of
course, on GOOD's website.


Futures margin mechanics

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Kind: captions
Language: en

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Let's think a
little bit about how

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margin works for a
futures contract.

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So let's say that the
terms of the contract

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are a 1,000 pounds of apples
for delivery on November 15,

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and we're assuming that this
is some date in the future.

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And right now in the
Futures Exchange,

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the market delivery
price, so the price

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at which the apples will change
hand in the future, is $200.

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And I've written here what
the exchange specifies

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for the initial and
maintenance margin,

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we'll talk about that
more in a second.

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But this essentially means that
both the buyer and the seller,

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for the initial margin,
have to put up $20.

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Sometimes it'll be specified
as an absolute dollar amount

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like I've just done.

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Sometimes it might
be a percentage

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of the actual delivery price.

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So they both have to
put up $20, and this guy

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has agreed to buy a
1,000 pounds of apples

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from this guy on
November 15 for $200.

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So it's essentially
$0.20 a pound.

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Now, let's say
that a day goes by,

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and the next day-- these
guys have this contract.

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This price right here
is fixed in their minds.

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But let's say, the next
day, the same contract

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between two other parties
trades with the delivery

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price of $190.

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Now, all of a sudden this
guy over here feels silly.

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He's like, man, I'm
agreeing to buy something

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for $200 in the future
which some other dude, all

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of a sudden, has
agreed to buy for $190.

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This guy over here
feels really smart.

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He agreed to sell something
for $200 the day before,

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and now people are
selling it for $190.

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So he's kind of $10
better than the people

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participating in the
Futures Market today.

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The way market to market
works with futures contracts

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is that the exchange
says, well, you know what?

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I'm afraid that this guy, if
things keep moving against him,

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he's not going to even
want to put up the money

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to buy it at $200 if he can
buy in the market at $190

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or something lower.

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So I'm going to reset their
futures contract to a delivery

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price of $190, but,
to make things fair,

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this guy's going to
be $10 in the hole.

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He's getting a $10 deal.

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If I take the delivery
price from $200 to $190,

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I need to take
$10 from this guy,

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because he's getting
a $10 better deal.

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So from his margin account,
I take it from $20 to $10.

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And then I place the $10 in
this guy's margin account.

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If he's going to get
$10 less of a good price

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on the delivery date, than let
me give him the $10 right now.

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So his margin account
will go to $30.

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Now, this number was
18, 17, 16, or 15,

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this guy wouldn't
have to do anything.

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But right here, he's triggered
his maintenance margin.

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Actually, he's right at
our maintenance margin.

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So let's say that he goes--
that the next day, this happens

00:02:52.010 --> 00:02:52.760
a little bit more.

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It goes down to $185, and we
have to do the process again.

00:02:56.650 --> 00:03:00.570
This guy loses $5,
he goes down to $5,

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This guy will be given
$5, so he goes to $35.

00:03:04.180 --> 00:03:09.370
In order for him to essentially
reset the Futures Price,

00:03:09.370 --> 00:03:11.420
he's been given another $5.

00:03:11.420 --> 00:03:15.180
Now, this guy has only
$5 in his margin account,

00:03:15.180 --> 00:03:17.640
and the maintenance
margin is $10.

00:03:17.640 --> 00:03:19.990
So triggers a margin
call, and this guy's

00:03:19.990 --> 00:03:24.550
got to find some place to put
another $15 in his margin call.

00:03:24.550 --> 00:03:27.420
Every time you get below
the maintenance margin,

00:03:27.420 --> 00:03:28.900
it triggers a
margin call, and you

00:03:28.900 --> 00:03:33.090
have to refill your margin
account to the initial margin.

00:03:33.090 --> 00:03:38.323
So he has to add $15,
so he gets back to $20.


Arbitraging futures contracts II

WEBVTT
Kind: captions
Language: en

00:00:00.507 --> 00:00:02.590
Let's say that the settlement
price for delivering

00:00:02.590 --> 00:00:06.020
1,000 pounds of
apples on October 20,

00:00:06.020 --> 00:00:08.590
which we're going to assume
is one year from now,

00:00:08.590 --> 00:00:11.090
let's assume that it's $200.

00:00:11.090 --> 00:00:13.640
Let's also assume that
the current market

00:00:13.640 --> 00:00:17.960
price for 1,000 pounds
of apples is also $200.

00:00:17.960 --> 00:00:20.870
So that future settlement
price is the same

00:00:20.870 --> 00:00:22.211
as the current market price.

00:00:22.211 --> 00:00:24.460
And we're also going to
assume, like the last example,

00:00:24.460 --> 00:00:26.630
that these apples that
we have never go bad.

00:00:26.630 --> 00:00:29.210
They're just things that
they never rot or anything.

00:00:29.210 --> 00:00:31.620
So they're as good in a
year as they are right now.

00:00:31.620 --> 00:00:33.920
Let's also assume, above
and beyond the assumptions

00:00:33.920 --> 00:00:36.750
of the last video, that
we can borrow and sell

00:00:36.750 --> 00:00:38.840
apples in the current market.

00:00:38.840 --> 00:00:41.230
That we can actually
short apples.

00:00:41.230 --> 00:00:43.917
So I go to someone who's got
1,000 pounds of apples who

00:00:43.917 --> 00:00:46.250
doesn't really see any need
for them over the next year,

00:00:46.250 --> 00:00:48.170
and I say, can I
borrow those apples?

00:00:48.170 --> 00:00:50.470
And what I do is I say,
I'll borrow those apples.

00:00:50.470 --> 00:00:53.120
I'll sell those apples
in the market today.

00:00:53.120 --> 00:00:56.450
And of the interest that
I get on those apples,

00:00:56.450 --> 00:00:58.770
I'm going to give you
1%, the person who

00:00:58.770 --> 00:01:00.350
actually owns the apples.

00:01:00.350 --> 00:01:02.310
And that person says,
oh, sure, why not?

00:01:02.310 --> 00:01:04.550
That way I actually get
some money on my apples

00:01:04.550 --> 00:01:07.210
that I had no intention
of using for a year.

00:01:07.210 --> 00:01:11.160
And then I, as the borrower
and seller, will get 4% net.

00:01:11.160 --> 00:01:14.440
I'll get 4% net on the apples.

00:01:14.440 --> 00:01:17.670
So given this reality, what
could I do, once again,

00:01:17.670 --> 00:01:20.890
to make a risk-free profit?

00:01:20.890 --> 00:01:23.330
Well, as you could imagine,
I can borrow and sell

00:01:23.330 --> 00:01:25.320
the apples for a year.

00:01:25.320 --> 00:01:26.410
So let me write this down.

00:01:26.410 --> 00:01:36.080
I'm going to borrow and
sell 1,000 pounds of apples.

00:01:36.080 --> 00:01:38.130
So if I just borrow
it today and sell it,

00:01:38.130 --> 00:01:41.880
today's market price is
$200 for 1,000 pounds.

00:01:41.880 --> 00:01:48.760
So I'm going to get $200.

00:01:48.760 --> 00:01:51.050
Now on top of that,
what I want to do

00:01:51.050 --> 00:01:56.567
is agree to be the buyer
on this futures contract.

00:01:56.567 --> 00:01:57.650
So let me write that down.

00:01:57.650 --> 00:02:02.410
Agree, you could say to go
long the futures contract,

00:02:02.410 --> 00:02:09.370
or agree to be buyer
on futures contract.

00:02:12.295 --> 00:02:14.370
So I'm agreeing,
a year from now,

00:02:14.370 --> 00:02:18.340
to buy 1,000 pounds
of apples for $200.

00:02:18.340 --> 00:02:19.670
So let's fast forward.

00:02:19.670 --> 00:02:21.410
Let's fast forward one year.

00:02:21.410 --> 00:02:22.730
So what's happened?

00:02:22.730 --> 00:02:26.160
So of the $200 I got
from shorting the apples

00:02:26.160 --> 00:02:27.810
I got 5% on that.

00:02:27.810 --> 00:02:29.620
But I had to give
1% to the person

00:02:29.620 --> 00:02:31.440
I borrowed the apples from.

00:02:31.440 --> 00:02:33.340
So I'm getting 4% net.

00:02:33.340 --> 00:02:37.490
4% on $200 is $8.

00:02:37.490 --> 00:02:43.850
So now I now have $208 because
I got that 4% interest.

00:02:43.850 --> 00:02:45.020
It was $210.

00:02:45.020 --> 00:02:49.010
I gave $2.00 to the person
who lent me the apples.

00:02:49.010 --> 00:02:53.170
Now I can use $200 of
that to essentially

00:02:53.170 --> 00:02:55.650
uphold my part of
the futures contract,

00:02:55.650 --> 00:02:59.990
to buy the apples for $200,
for that agreed upon price.

00:02:59.990 --> 00:03:05.840
So $200 to buy apples.

00:03:05.840 --> 00:03:08.090
And I know I can do this
regardless of what the market

00:03:08.090 --> 00:03:11.020
price is because that was the
delivery price on the futures

00:03:11.020 --> 00:03:12.030
contract.

00:03:12.030 --> 00:03:13.960
So now I have $8 net.

00:03:17.310 --> 00:03:19.060
And those apples that
I've just bought,

00:03:19.060 --> 00:03:21.400
those 1,000 pounds
of apples, I can then

00:03:21.400 --> 00:03:24.190
use those apples to
return it to the person

00:03:24.190 --> 00:03:25.830
that I borrowed the apples from.

00:03:25.830 --> 00:03:27.190
So they got their apples back.

00:03:27.190 --> 00:03:31.300
And they got that 1% on the $200
over the course of the year.

00:03:31.300 --> 00:03:34.490
And I made a risk-free $8.

00:03:34.490 --> 00:03:36.260
So if you think
about it once again,

00:03:36.260 --> 00:03:40.150
this is setting a lower bound
on what the actual settlement

00:03:40.150 --> 00:03:41.880
price on the
futures contract is.

00:03:41.880 --> 00:03:44.640
I should not be able to
make this risk-free profit.

00:03:44.640 --> 00:03:46.830
If it's available,
then people will do it.

00:03:46.830 --> 00:03:49.810
And what it will do is
it will increase demand

00:03:49.810 --> 00:03:51.380
to be the buyer here.

00:03:51.380 --> 00:03:53.250
So this price should go up.

00:03:53.250 --> 00:03:56.570
And it would increase supply
on the selling side here.

00:03:56.570 --> 00:04:00.770
And so maybe this price
over here would go down.


Arbitraging futures contract

WEBVTT
Kind: captions
Language: en

00:00:00.474 --> 00:00:02.936
Male voiceover: Let's say that the
current market settlement price

00:00:02.936 --> 00:00:06.742
for a Futures Contract
that specifies the delivery

00:00:06.742 --> 00:00:10.869
of a thousand pounds of
apples on October 20th

00:00:10.869 --> 00:00:13.852
and just for the simplicity
of the math in this example,

00:00:13.852 --> 00:00:16.672
let's assume that that is one year away

00:00:16.672 --> 00:00:19.687
and the current settlement
price, the current market price

00:00:19.687 --> 00:00:24.813
on the future exchange for
delivery on that date is $300.

00:00:24.813 --> 00:00:28.076
Let's also assume that
the current market price,

00:00:28.076 --> 00:00:31.470
if you were to buy or sell
apples today not on October 20th,

00:00:31.470 --> 00:00:34.336
which is a year away
but today, let's assume

00:00:34.336 --> 00:00:37.067
that the current market price is $200.

00:00:37.067 --> 00:00:40.954
Let's also assume that if you
were to take out a $200 loan

00:00:40.954 --> 00:00:43.673
that you would have to pay 10% interest.

00:00:43.673 --> 00:00:45.545
If you were to borrow $200 today,

00:00:45.545 --> 00:00:49.804
you would essentially have
to pay back $220 in a year.

00:00:49.804 --> 00:00:52.556
Now, given all of the
parameters that I've set up,

00:00:52.556 --> 00:00:55.201
is there a way to make risk-free profits?

00:00:55.201 --> 00:00:58.780
Is there way to kind of
arbitrage this situation?

00:00:58.780 --> 00:01:01.268
And as you can imagine, there is

00:01:01.268 --> 00:01:05.207
and what we can do is, we can borrow $200,

00:01:05.207 --> 00:01:06.291
Let me list it all out.

00:01:06.291 --> 00:01:13.376
We can borrow $200 and then use that $200

00:01:13.376 --> 00:01:18.302
to buy 1,000 pounds of apples.

00:01:18.302 --> 00:01:22.703
Then we buy 1,000 pounds of apples.

00:01:22.703 --> 00:01:26.606
We keep them in our garage
or some place like that

00:01:26.606 --> 00:01:32.412
and then we also sell
or I guess we could say,

00:01:32.412 --> 00:01:35.064
we become the seller on
this Futures Contract

00:01:35.064 --> 00:01:37.122
or we sell the Futures short,

00:01:37.122 --> 00:01:38.976
I guess is another way to think about it.

00:01:38.976 --> 00:01:49.620
We also become the seller
on the Futures Contract.

00:01:49.620 --> 00:01:53.703
Essentially, we are agreeing
to sell 1,000 pounds of apples

00:01:53.703 --> 00:01:59.030
on October 20th, a year from now for $300.

00:01:59.030 --> 00:02:01.495
So I wanna show you is
if we set it up this way,

00:02:01.495 --> 00:02:04.229
we are guaranteed to make money no matter

00:02:04.229 --> 00:02:06.440
what happens to the price of apples

00:02:06.440 --> 00:02:08.376
and that's why we're
calling it an arbitrage

00:02:08.376 --> 00:02:10.298
because if you fast forward one year,

00:02:10.298 --> 00:02:13.741
so let's fast forward one year.

00:02:13.741 --> 00:02:17.407
In one year, we definitely
have 1,000 pounds of apples

00:02:17.407 --> 00:02:19.370
and just for the sake of simplicity,

00:02:19.370 --> 00:02:21.976
let's assume that apples don't get bad

00:02:21.976 --> 00:02:24.603
that I've somehow freeze-dried
them or I don't know.

00:02:24.956 --> 00:02:27.919
These are apples that never spoil.

00:02:27.919 --> 00:02:29.281
(chuckles) Let's say a year from now,

00:02:29.281 --> 00:02:31.719
I have the thousand pounds of apples

00:02:31.719 --> 00:02:35.007
so I give the apples to
settle the Futures Contract.

00:02:35.007 --> 00:02:42.940
Give apples to settle the contract

00:02:42.940 --> 00:02:45.542
and then of course, I have my loan.

00:02:45.542 --> 00:02:47.764
I have my loan of $200 but guess what?

00:02:47.764 --> 00:02:50.119
When I settled the contract,

00:02:50.119 --> 00:02:53.605
when I settled the Futures
Contract, I got $300.

00:02:53.605 --> 00:02:58.207
So, I get 300 dollars and what do I owe?

00:02:58.207 --> 00:03:01.206
Well, I owe $220 on my loan.

00:03:01.206 --> 00:03:03.103
Let me subtract that out.

00:03:03.103 --> 00:03:09.397
I owe $220 and so I made
a guaranteed risk-free $80

00:03:09.397 --> 00:03:12.669
of profit in one year
and we're not thinking

00:03:12.669 --> 00:03:15.321
about how much money I might
have had to set aside for margin

00:03:15.321 --> 00:03:17.497
but this essentially, just free money

00:03:17.497 --> 00:03:20.215
and if you think about it,

00:03:20.215 --> 00:03:22.519
if this settlement price is anything,

00:03:22.519 --> 00:03:26.162
if the settlement price
is anything above the $220

00:03:26.162 --> 00:03:29.369
then I'm going to make a risk-free profit.

00:03:30.092 --> 00:03:32.365
One way to think about
Futures pricing is even

00:03:32.365 --> 00:03:34.371
if you think there's
going to be a cold snap

00:03:34.371 --> 00:03:36.007
and apples are going to disappear

00:03:36.007 --> 00:03:37.643
and there's going to be
the shortage of apples

00:03:37.643 --> 00:03:39.628
and so you might say, "Hey,
maybe the apple prices

00:03:39.628 --> 00:03:41.752
"will go up." a year ago,

00:03:41.752 --> 00:03:43.676
there's always going to be a way

00:03:43.676 --> 00:03:46.001
to arbitrage it if the settlement price,

00:03:46.001 --> 00:03:50.231
if the growth in price
is more than the cost

00:03:50.231 --> 00:03:52.207
of borrowing the same amount of money,

00:03:52.207 --> 00:03:55.035
the cost of borrowing $200.

00:03:55.035 --> 00:03:58.079
In this situation, the
cost of borrowing is $20.

00:03:58.079 --> 00:04:00.387
The settlement price really shouldn't be,

00:04:00.387 --> 00:04:02.826
if we assume that there's
no arbitrage opportunities,

00:04:02.826 --> 00:04:06.826
it really shouldn't be more than $220.


Arbitrage basics

WEBVTT
Kind: captions
Language: en

00:00:00.700 --> 00:00:03.640
The word arbitrage
sounds very fancy,

00:00:03.640 --> 00:00:05.690
but it's actually
a very simple idea.

00:00:05.690 --> 00:00:08.039
It's really just
taking advantage

00:00:08.039 --> 00:00:11.680
of differences in price on
essentially the same thing

00:00:11.680 --> 00:00:13.095
to make risk-free profit.

00:00:13.095 --> 00:00:14.720
So let's just think
about a little bit.

00:00:14.720 --> 00:00:19.330
Let's say in one part of town
there's some type of a market.

00:00:19.330 --> 00:00:21.910
Let's say it's a
market for apples.

00:00:21.910 --> 00:00:24.380
And let's say in
that market, apples

00:00:24.380 --> 00:00:28.500
sell for-- just
make up some price.

00:00:28.500 --> 00:00:32.140
Let's say that apple's in
that market, sell for $1

00:00:32.140 --> 00:00:35.710
an apple, $1 per apple.

00:00:35.710 --> 00:00:39.410
And let's say in another part of
town, you have another market.

00:00:39.410 --> 00:00:41.880
Another market's
literally a fruit market.

00:00:41.880 --> 00:00:53.770
And in that other part of town,
apples sell for $1.50 an apple.

00:00:53.770 --> 00:00:56.100
And we're going to assume
that these apples are

00:00:56.100 --> 00:00:58.080
completely identical apples.

00:00:58.080 --> 00:01:01.080
How could you take advantage
in this price difference

00:01:01.080 --> 00:01:05.080
on these identical things
to make a risk-free profit?

00:01:05.080 --> 00:01:07.800
Well ideally, you would want
to sell apples in the more

00:01:07.800 --> 00:01:10.980
expensive market where you
could get $1.50 per apple.

00:01:10.980 --> 00:01:13.810
And you would want to buy apples
in the less expensive market

00:01:13.810 --> 00:01:16.020
where you can get
them for $1 per apple.

00:01:16.020 --> 00:01:18.500
And that's exactly
what you would do.

00:01:18.500 --> 00:01:21.500
You would go do this market
over here, you would buy apples.

00:01:21.500 --> 00:01:28.470
Let's say you buy
10 apples for $10.

00:01:28.470 --> 00:01:31.260
And then you would go
maybe ride your bicycle

00:01:31.260 --> 00:01:34.110
a couple of blocks to that
other market over there.

00:01:34.110 --> 00:01:35.750
And you would sell
your 10 apples.

00:01:35.750 --> 00:01:38.690
So this is buy 10
apples for $10.

00:01:38.690 --> 00:01:46.264
And then you would sell
those 10 apples for $15.

00:01:48.840 --> 00:01:52.675
And so you would make an
immediate risk-free profit

00:01:52.675 --> 00:01:53.920
of $5.

00:01:53.920 --> 00:01:55.750
You're buying for
10, selling at 5.

00:01:55.750 --> 00:01:58.570
And you could just keep doing
that over and over again.

00:01:58.570 --> 00:02:02.240
And on every trip as many apples
as your bicycle could carry

00:02:02.240 --> 00:02:04.430
you'll just continue
to make money.

00:02:04.430 --> 00:02:06.940
And so this is
what arbitrage is.

00:02:06.940 --> 00:02:08.690
And just imagine a side effect.

00:02:08.690 --> 00:02:11.440
If someone did this
enough, then what would do

00:02:11.440 --> 00:02:14.170
is it would increase the
supply of apples here.

00:02:14.170 --> 00:02:17.690
So supply would
increase in this market.

00:02:17.690 --> 00:02:19.190
And on this market,
the demand would

00:02:19.190 --> 00:02:21.230
increase because
there's someone who

00:02:21.230 --> 00:02:23.580
just keeps buying
from this market

00:02:23.580 --> 00:02:25.330
and selling into that market.

00:02:25.330 --> 00:02:27.980
So what's eventually going to
happen when demand increases,

00:02:27.980 --> 00:02:32.300
the price will go
up in this market.

00:02:32.300 --> 00:02:34.900
And when the supply
increases in this market,

00:02:34.900 --> 00:02:37.170
the price will go down.

00:02:37.170 --> 00:02:39.200
So in theory, the
more you do this,

00:02:39.200 --> 00:02:41.400
the more that you're going
to make these prices come

00:02:41.400 --> 00:02:42.551
closer to each other.

00:02:42.551 --> 00:02:45.050
And eventually, you won't be
able to make any profit at all.

00:02:45.050 --> 00:02:47.190
But while there's
this discrepancy,

00:02:47.190 --> 00:02:50.397
you have an opportunity
for arbitrage.


Motivation for the futures exchange

WEBVTT
Kind: captions
Language: en

00:00:00.399 --> 00:00:03.884
Male voiceover: You might be wondering
why the exchange would be willing

00:00:03.884 --> 00:00:06.811
to take on the counter party
risk for people trained,

00:00:06.811 --> 00:00:11.599
exchanging these kinds of
standardized Futures Contract.

00:00:11.599 --> 00:00:14.006
The first reason is that
the exchange actually stands

00:00:14.006 --> 00:00:16.073
to make a lot of money.

00:00:16.073 --> 00:00:17.934
What he can do is tell these people

00:00:17.934 --> 00:00:19.935
who wanna buy apples in the future,

00:00:19.935 --> 00:00:24.994
he could say for example, "Hey, you
can enter into a Futures Contract

00:00:24.994 --> 00:00:28.438
" with a settlement price
of 22 cents per pound."

00:00:28.485 --> 00:00:31.263
So that's what they're going to
have to come to the table with.

00:00:31.278 --> 00:00:35.604
That is 22 cents per pound
and he could tell the people

00:00:35.604 --> 00:00:37.068
who are gonna deliver the apples

00:00:37.068 --> 00:00:39.469
that when you deliver the apples,

00:00:39.469 --> 00:00:44.067
the settlement price
is 20 cents per pound.

00:00:44.067 --> 00:00:46.669
Essentially, when the settlement occurs,

00:00:46.669 --> 00:00:52.285
he's going to be able
to make a 2 cent profit.

00:00:52.285 --> 00:00:54.273
Let me review that again.

00:00:54.273 --> 00:00:57.645
If he only has to pay these guys
20 cents a pound for the apples,

00:00:57.645 --> 00:01:01.879
and these guys are paying 22
cents a pound for the apples,

00:01:01.879 --> 00:01:04.263
maybe I should make this
arrow go in this direction

00:01:04.263 --> 00:01:06.074
because this is the flow
of the actual money.

00:01:06.074 --> 00:01:08.405
If these guys are going to
pay 22 cents for the apples

00:01:08.405 --> 00:01:10.019
and then as the exchange,

00:01:10.034 --> 00:01:12.346
this guy only has to give
20 cents to the farmers,

00:01:12.346 --> 00:01:14.343
he's going to make 2 cents profit.

00:01:14.343 --> 00:01:18.935
On Futures Contracts, on
1,000 pounds of apples

00:01:18.935 --> 00:01:21.813
that's going to be $20 for
each of those contracts.

00:01:21.813 --> 00:01:29.899
That's going to be $20 per contract

00:01:29.899 --> 00:01:31.607
and he's going to be
doing this night and day,

00:01:31.607 --> 00:01:33.408
trading with all of the different farmers

00:01:33.408 --> 00:01:34.891
and all of the different customers

00:01:34.891 --> 00:01:37.060
and even some speculators
who might wanna do this.

00:01:37.060 --> 00:01:39.378
So maybe if the spread, if we

00:01:39.378 --> 00:01:41.634
kind of can maintain this 2 cents spread,

00:01:41.634 --> 00:01:44.343
he'll keep making $20 every time one

00:01:44.343 --> 00:01:47.007
of these Futures Contracts exchange hands.

00:01:47.007 --> 00:01:49.240
Now, the other way that he's
going to protect himself

00:01:49.240 --> 00:01:51.682
against losses is he's going to make each

00:01:51.682 --> 00:01:55.817
of these parties set
aside some money in case,

00:01:55.817 --> 00:01:59.784
the Futures Contract
price moves against them

00:01:59.784 --> 00:02:03.389
and this money that they have
to set aside is called Margin

00:02:03.389 --> 00:02:06.455
and I'll explain this in more
detail in the future video

00:02:06.455 --> 00:02:10.601
but what it essentially
is, is the amount of money

00:02:10.601 --> 00:02:16.456
that this guy or the largest
amount that this guy thinks

00:02:16.456 --> 00:02:18.855
that the Futures price might move by,

00:02:18.855 --> 00:02:21.866
the contract price might
move by any given day

00:02:21.866 --> 00:02:23.341
and so, he has a cushion.

00:02:23.341 --> 00:02:26.854
He can actually use the
margin as kind of insurance

00:02:26.854 --> 00:02:29.410
so he can make sure that
on the settlement date,

00:02:29.410 --> 00:02:30.132
both parties

00:02:30.762 --> 00:02:33.008
will kind of be able to

00:02:33.593 --> 00:02:35.218
meet their obligations.

00:02:35.218 --> 00:02:36.989
I'll go into more detail
with that on the next video

00:02:36.989 --> 23:59:59.999
on exactly how margin works.


Futures introduction

WEBVTT
Kind: captions
Language: en

00:00:00.630 --> 00:00:03.770
After the farmer
and the pie chain

00:00:03.770 --> 00:00:06.100
get involved in this
forward contract,

00:00:06.100 --> 00:00:09.200
a few questions start to pop
up in each of their minds.

00:00:09.200 --> 00:00:11.890
The main one is, what
if the other party isn't

00:00:11.890 --> 00:00:15.700
able to uphold their
end of the contract?

00:00:15.700 --> 00:00:21.550
And this is called counterparty
risk, which is essentially,

00:00:21.550 --> 00:00:24.570
the counterparty to the
farmer is the pie store.

00:00:24.570 --> 00:00:27.730
And the counterparty to the
pie chain is the farmer.

00:00:27.730 --> 00:00:29.240
It is the risk that
the other party

00:00:29.240 --> 00:00:32.630
won't be able to uphold
their end of the contract.

00:00:32.630 --> 00:00:35.120
The other thing that starts
to worry either one of these

00:00:35.120 --> 00:00:36.995
is what if they start
to have second thoughts

00:00:36.995 --> 00:00:39.580
about this forward
contract they entered into.

00:00:39.580 --> 00:00:42.330
Would they be able to
maybe sell their obligation

00:00:42.330 --> 00:00:43.680
to someone else?

00:00:43.680 --> 00:00:48.890
So is there any way
to trade the contract?

00:00:48.890 --> 00:00:51.670
And then there's another
issue, that even if you

00:00:51.670 --> 00:00:53.460
were to trade the
contract, how do

00:00:53.460 --> 00:00:56.510
we know that the other party
to the whoever you might want

00:00:56.510 --> 00:01:00.170
to trade with would be cool with
a million pounds, or $200,000.

00:01:00.170 --> 00:01:02.790
Maybe they would want to
deal with a smaller quantity.

00:01:02.790 --> 00:01:04.739
Maybe they would only
want 1,000 pounds

00:01:04.739 --> 00:01:08.000
or $100,000 worth of apples.

00:01:08.000 --> 00:01:12.680
So the local brain
comes up with an idea.

00:01:12.680 --> 00:01:14.760
He's like, why
don't we standardize

00:01:14.760 --> 00:01:16.670
these forward contracts?

00:01:16.670 --> 00:01:20.250
Why don't I just create a
bunch of contracts, whenever

00:01:20.250 --> 00:01:22.740
someone wants to enter to one
of these forward contract,

00:01:22.740 --> 00:01:24.070
but I standardize them.

00:01:24.070 --> 00:01:27.050
And I say that it is 1,000,
instead of having a million

00:01:27.050 --> 00:01:29.760
apples, I do a small
enough increment.

00:01:29.760 --> 00:01:39.700
So I say 1,000 pounds of apples
for the delivery on let's say

00:01:39.700 --> 00:01:42.390
on November 15.

00:01:42.390 --> 00:01:44.980
And every one of these
contracts say the same thing.

00:01:44.980 --> 00:01:48.480
1,000 pounds of apples
for delivery on 11/15.

00:01:48.480 --> 00:01:51.080
And this guy, he's also
the richest guy in town.

00:01:51.080 --> 00:01:53.270
He's already been
running a stock exchange.

00:01:53.270 --> 00:01:58.270
And so to help alleviate
the counterparty risk fear,

00:01:58.270 --> 00:02:03.770
he also says that I'm
going to guarantee

00:02:03.770 --> 00:02:05.980
any of these contracts.

00:02:05.980 --> 00:02:10.110
So essentially he's taking on
all of the counterparty risk

00:02:10.110 --> 00:02:13.370
to make people more
comfortable with trading.

00:02:13.370 --> 00:02:16.550
So all of a sudden, what
happens is that now these guys

00:02:16.550 --> 00:02:18.750
don't have to do a
one off contract.

00:02:18.750 --> 00:02:21.440
They don't have to do this
one off the forward contract.

00:02:21.440 --> 00:02:23.480
There are these
standardized contracts

00:02:23.480 --> 00:02:26.000
that this exchange
can now trade.

00:02:26.000 --> 00:02:28.950
And what happens is
that smaller farmers.

00:02:28.950 --> 00:02:30.560
Let me do this in
a different color.

00:02:30.560 --> 00:02:37.530
You have farmer A,
farmer B. Farmer B

00:02:37.530 --> 00:02:41.030
can now can now transact
with, I should say,

00:02:41.030 --> 00:02:49.240
I guess we could call it
customer C and customer D.

00:02:49.240 --> 00:02:51.590
Where they could agree
to have a fixed price,

00:02:51.590 --> 00:02:53.200
but they could do
smaller increments,

00:02:53.200 --> 00:02:55.052
more granular increments.

00:02:55.052 --> 00:02:56.760
And if any of them
want to get out of it,

00:02:56.760 --> 00:02:58.660
they can by selling
their contract

00:02:58.660 --> 00:03:00.890
to another person
on the exchange.

00:03:00.890 --> 00:03:03.260
And these more standardized
forward contracts, they're

00:03:03.260 --> 00:03:05.057
still essentially
the same thing.

00:03:05.057 --> 00:03:06.140
They're just standardized.

00:03:06.140 --> 00:03:09.470
They're agreements to
transact at a future date,

00:03:09.470 --> 00:03:12.720
give a certain amount of
money for a certain amount

00:03:12.720 --> 00:03:13.950
of something else.

00:03:13.950 --> 00:03:15.260
It could be a security.

00:03:15.260 --> 00:03:16.840
It could be apples.

00:03:16.840 --> 00:03:20.200
These things, these standardized
forward contracts, these

00:03:20.200 --> 00:03:25.040
are called futures, where
they're standardized,

00:03:25.040 --> 00:03:27.596
and they are traded
on an exchange.


Forward contract introduction

WEBVTT
Kind: captions
Language: en

00:00:00.650 --> 00:00:04.870
Every year this apple farmer
produces one million pounds

00:00:04.870 --> 00:00:05.375
of apples.

00:00:08.050 --> 00:00:09.510
But he's got a problem.

00:00:09.510 --> 00:00:12.520
Every year the apple price
jumps around a bunch.

00:00:12.520 --> 00:00:16.690
Sometimes it sells after
the harvest for over $0.30,

00:00:16.690 --> 00:00:19.320
and this guy makes a
ton of money per pound.

00:00:19.320 --> 00:00:22.060
And then sometimes it drops
down to $0.10 per pound,

00:00:22.060 --> 00:00:24.860
and this guy can't
even cover his costs.

00:00:24.860 --> 00:00:26.450
And on the other
side of the equation,

00:00:26.450 --> 00:00:29.060
you have this pie
chain right over here.

00:00:29.060 --> 00:00:33.440
So they specialize
in making apple pies.

00:00:33.440 --> 00:00:36.140
And when the price of
apples goes super high,

00:00:36.140 --> 00:00:38.070
these guys can't
cover their costs.

00:00:38.070 --> 00:00:39.410
They start running a loss.

00:00:39.410 --> 00:00:41.230
But when the price
goes really low,

00:00:41.230 --> 00:00:42.590
they have this kind of bonanza.

00:00:42.590 --> 00:00:45.580
But neither party here
likes this scenario.

00:00:45.580 --> 00:00:47.610
They don't like the
unpredictability

00:00:47.610 --> 00:00:52.090
of one year having a feast and
then one year having a famine.

00:00:52.090 --> 00:00:53.790
So what they can
do is, let's say

00:00:53.790 --> 00:00:55.520
we have the harvest coming up.

00:00:55.520 --> 00:00:57.590
The pie farmer is
kind of afraid.

00:00:57.590 --> 00:01:00.920
Well, what if the price of pies
goes back down to $0.10 per

00:01:00.920 --> 00:01:01.600
pound?

00:01:01.600 --> 00:01:03.100
Then he's going to go broke.

00:01:03.100 --> 00:01:04.650
The pie chain is afraid.

00:01:04.650 --> 00:01:08.120
What the price of pies
goes up to $0.30 a pound?

00:01:08.120 --> 00:01:10.240
Then these guys are
going to go broke.

00:01:10.240 --> 00:01:12.880
So what they can do is
agree ahead of time,

00:01:12.880 --> 00:01:16.300
regardless of what the
actual market price of pies

00:01:16.300 --> 00:01:18.670
ends up being after
the harvest, they

00:01:18.670 --> 00:01:21.760
could agree to transact
at a specified price.

00:01:21.760 --> 00:01:24.710
So they could set up a
little contract right here.

00:01:24.710 --> 00:01:36.140
So they could set up a contract
where the chain agrees to buy

00:01:36.140 --> 00:01:40.660
one million pounds at
a specified date,--

00:01:40.660 --> 00:01:42.960
let's just say
after the harvest--

00:01:42.960 --> 00:01:50.400
at the harvest
for $0.20 a pound.

00:01:50.400 --> 00:01:54.240
This works out well for the
chain because regardless

00:01:54.240 --> 00:01:56.190
of what the market
price ends up being,

00:01:56.190 --> 00:01:59.020
they can ensure that they
will pay $0.20 a pound,

00:01:59.020 --> 00:02:01.710
which is a good price where
they could make a decent profit

00:02:01.710 --> 00:02:03.960
and at least they have the
predictability and they can

00:02:03.960 --> 00:02:04.800
plan on things.

00:02:04.800 --> 00:02:07.850
And it works out for the farmer
because he knows that a $0.20

00:02:07.850 --> 00:02:11.420
a pound, he can cover his costs
and pay his rent and pay his

00:02:11.420 --> 00:02:13.740
employees and feed his family.

00:02:13.740 --> 00:02:15.920
And it also takes out
the unpredictability,

00:02:15.920 --> 00:02:20.180
the volatility for him as well.

00:02:20.180 --> 00:02:22.580
So what we have
set up right here

00:02:22.580 --> 00:02:25.970
is actually called
a forward contract.

00:02:25.970 --> 00:02:28.900
This is a forward contract.

00:02:28.900 --> 00:02:31.700
And what it is, as you
can see, is in agreement

00:02:31.700 --> 00:02:34.320
and it's an obligation
for both parties

00:02:34.320 --> 00:02:38.200
to transact in the future
at a specified price.

00:02:38.200 --> 00:02:42.797
So at the time of this harvest
when they write this contract,

00:02:42.797 --> 00:02:45.380
they would specify this date--
I don't know what it might be--

00:02:45.380 --> 00:02:46.750
November 15.

00:02:46.750 --> 00:02:49.620
And at November
15, this farmer is

00:02:49.620 --> 00:02:53.210
obligated to deliver
million pounds of apples.

00:02:53.210 --> 00:02:57.040
And then this pie chain is
obligated to produce the money,

00:02:57.040 --> 00:03:02.450
to pay $0.20 a pound or
essentially produce $200,000.

00:03:02.450 --> 00:03:04.310
And that way, they
both are essentially

00:03:04.310 --> 00:03:07.750
able to avoid the
volatility and make sure

00:03:07.750 --> 00:03:09.809
that they can survive.


Option expiration and price

WEBVTT
Kind: captions
Language: en

00:00:00.570 --> 00:00:04.750
Let's explore a bit how the
price of an option can vary,

00:00:04.750 --> 00:00:07.680
or how it can relate to
the actual expiration date.

00:00:07.680 --> 00:00:10.730
So what I'm going to do is
compare two similar options

00:00:10.730 --> 00:00:13.550
with the underlying stock
being General Electric.

00:00:13.550 --> 00:00:15.660
And they're going to be
the same in every way,

00:00:15.660 --> 00:00:18.880
except one is going to have a
further out expiration date.

00:00:18.880 --> 00:00:22.480
So let's compare this
call option right here.

00:00:22.480 --> 00:00:28.430
So this is a call option on
GE with a $17 strike price.

00:00:28.430 --> 00:00:31.800
So it's the option to
buy GE stock at $17.

00:00:31.800 --> 00:00:34.640
And it has an April,
2011 expiration.

00:00:34.640 --> 00:00:37.086
So it's going to expire,
or the last day of trading

00:00:37.086 --> 00:00:38.460
that you could
trade this option,

00:00:38.460 --> 00:00:40.520
will be the third
Friday in April.

00:00:40.520 --> 00:00:45.310
Let's compare that with an
option that has the same strike

00:00:45.310 --> 00:00:49.690
price, but has a
December, 2011 expiration.

00:00:49.690 --> 00:00:53.710
So we're going to look for $17
strike price right over here.

00:00:53.710 --> 00:00:56.830
And you can see right when
you compare the options

00:00:56.830 --> 00:01:01.110
that the one that has a further
out expiration cost more.

00:01:01.110 --> 00:01:07.520
This one costs $3.25, while
this one only cost $2.36.

00:01:07.520 --> 00:01:09.870
And the reason why
it costs more is

00:01:09.870 --> 00:01:14.530
because you get to retain
the option for longer.

00:01:14.530 --> 00:01:16.720
So you could imagine, $17.

00:01:16.720 --> 00:01:19.050
Let's say that $17
is right over here.

00:01:19.050 --> 00:01:22.000
Let me draw a
hypothetical stock chart.

00:01:22.000 --> 00:01:25.750
So let's say that $17
is right over here.

00:01:25.750 --> 00:01:27.260
And so you could
imagine, let's say,

00:01:27.260 --> 00:01:30.012
that you have both
of those options.

00:01:30.012 --> 00:01:32.470
Or you have the option to have
either one of those options.

00:01:32.470 --> 00:01:37.540
And let's say that the stock
does something like that.

00:01:37.540 --> 00:01:39.040
Well, it's going
to be in the money.

00:01:39.040 --> 00:01:43.880
You have the right, if you own
either one of those options,

00:01:43.880 --> 00:01:47.080
you have the option to
buy the stock at $17

00:01:47.080 --> 00:01:49.120
and then sell it at
whatever price this is.

00:01:49.120 --> 00:01:52.280
Maybe this price over here
is like $20 something.

00:01:52.280 --> 00:01:53.700
So you would make money.

00:01:53.700 --> 00:01:57.850
But if you have the option
with a closer expiration,

00:01:57.850 --> 00:02:00.650
with the April,
2011 expiration, you

00:02:00.650 --> 00:02:02.830
have to exercise the
option right now.

00:02:02.830 --> 00:02:05.050
You would have to
exercise it right now

00:02:05.050 --> 00:02:06.680
and close out the option.

00:02:06.680 --> 00:02:09.539
If you had the longer dated
option, you could do it.

00:02:09.539 --> 00:02:11.090
You could do the
exact same thing

00:02:11.090 --> 00:02:14.690
that this owner of an
April, 2011 option has.

00:02:14.690 --> 00:02:17.090
Or you can hold the
option and maybe see

00:02:17.090 --> 00:02:19.350
if the stock continues to go up.

00:02:19.350 --> 00:02:23.070
Or you could imagine
a downside scenario.

00:02:23.070 --> 00:02:24.910
Maybe the stock does
something like this,

00:02:24.910 --> 00:02:26.380
where it goes out of the money.

00:02:26.380 --> 00:02:30.200
Someone who holds the closer
dated option, the one that

00:02:30.200 --> 00:02:32.910
expires first, they'll be
completely out of the money.

00:02:32.910 --> 00:02:35.260
The option would be
worthless on this date.

00:02:35.260 --> 00:02:39.280
But if you have the
longer expiration,

00:02:39.280 --> 00:02:42.952
if your option does not
expire until December of 2011,

00:02:42.952 --> 00:02:43.910
then you could hold it.

00:02:43.910 --> 00:02:46.620
And maybe, maybe the stock
will do something nice.

00:02:46.620 --> 00:02:48.750
There's some probability
that it will one day

00:02:48.750 --> 00:02:50.650
become in the money.

00:02:50.650 --> 00:02:51.880
I want to make it clear.

00:02:51.880 --> 00:02:54.660
Even if you have
this situation here,

00:02:54.660 --> 00:02:57.100
and you hold the
longer dated option--

00:02:57.100 --> 00:03:00.710
you have the option that's
going to expire in December--

00:03:00.710 --> 00:03:03.230
you still would not
want to exercise it.

00:03:03.230 --> 00:03:05.630
Because there is
someone who would still

00:03:05.630 --> 00:03:08.240
enjoy all of this
optionality of the future.

00:03:08.240 --> 00:03:10.980
So what you're better off
doing, instead of exercising

00:03:10.980 --> 00:03:14.690
the option, you're better off
selling the longer dated option

00:03:14.690 --> 00:03:15.630
right over there.

00:03:15.630 --> 00:03:18.070
And you should be able to
capture at least as much profit

00:03:18.070 --> 00:03:21.360
as you would from exercising the
option, plus capturing whatever

00:03:21.360 --> 00:03:25.990
value the buyer sees in
the future optionality.


Ape Clarification

WEBVTT
Kind: captions
Language: en

00:00:00.550 --> 00:00:02.880
In the first video
on evolution, I

00:00:02.880 --> 00:00:05.890
drew something that
I called an ape.

00:00:05.890 --> 00:00:07.562
And then I drew a tail on it.

00:00:07.562 --> 00:00:09.020
And what I want to
do in this video

00:00:09.020 --> 00:00:12.340
is clarify that that
was absolutely wrong.

00:00:12.340 --> 00:00:16.700
Apes have no tails.

00:00:16.700 --> 00:00:18.890
And it's actually one of
the main distinguishing

00:00:18.890 --> 00:00:20.670
characteristics of apes.

00:00:20.670 --> 00:00:24.240
There's obviously other primates
that also have no tails.

00:00:24.240 --> 00:00:27.660
But apes definitely
have no tails.

00:00:27.660 --> 00:00:29.070
And just to clarify,
there's kind

00:00:29.070 --> 00:00:30.610
of two families within apes.

00:00:30.610 --> 00:00:34.090
And their common names are the
lesser apes and the great apes.

00:00:34.090 --> 00:00:40.010
And the lesser apes are
things like gibbons.

00:00:40.010 --> 00:00:42.720
And the great apes are
things like chimpanzees,

00:00:42.720 --> 00:00:46.300
and gorillas, and
me, human beings.

00:00:46.300 --> 00:00:49.170
So these right here,
these are the great apes.

00:00:53.240 --> 00:00:55.860
And clearly, this
great ape right here,

00:00:55.860 --> 00:00:59.860
did not have a great
sense of style in 1994.

00:00:59.860 --> 00:01:03.400
And really didn't feel the
need to have a haircut.


Actual option quotes

WEBVTT
Kind: captions
Language: en

00:00:00.290 --> 00:00:04.005
Voiceover: Here are some
option quotes from CNBC.com

00:00:04.005 --> 00:00:06.394
and my goal here is to
really just familiarize you

00:00:06.394 --> 00:00:08.879
with the quote, so you know
what you're looking at.

00:00:08.879 --> 00:00:11.085
So the first thing to
realize is that options are

00:00:11.085 --> 00:00:13.250
categorized by expiration dates.

00:00:13.250 --> 00:00:15.970
So these options that
I've listed right here

00:00:15.970 --> 00:00:21.368
are expiring in April 2011
and options expire or they

00:00:21.368 --> 00:00:25.544
usually expire on the
third Friday of any month

00:00:25.544 --> 00:00:29.010
or I guess to be exact, the
third Friday of the month

00:00:29.010 --> 00:00:31.093
is the last day that you could trade them.

00:00:31.093 --> 00:00:33.993
They officially expire
the Saturday after that.

00:00:33.993 --> 00:00:37.460
And these are options on
GE, the last stock quote.

00:00:37.460 --> 00:00:41.390
It last traded at $18.95 and the way

00:00:41.390 --> 00:00:44.267
that that's listed on CNBC.com,
and it tends to be listed

00:00:44.267 --> 00:00:47.535
this way pretty much anywhere
that you look at option quotes,

00:00:47.535 --> 00:00:50.793
is that they list the calls
on one side and then the puts

00:00:50.793 --> 00:00:53.921
on the other side and these
are obviously calls and puts on

00:00:53.921 --> 00:00:56.516
General Electric and then
they write the strike prices

00:00:56.516 --> 00:00:59.052
down the middle in increasing order.

00:00:59.052 --> 00:01:03.333
So the first column, this is just the
symbol for that particular option.

00:01:03.333 --> 00:01:07.018
This is the last trading price. This
is how much it's changed that day.

00:01:07.060 --> 00:01:09.361
The low and the high
give the range of trading

00:01:09.361 --> 00:01:10.878
that day on that option.

00:01:10.878 --> 00:01:14.483
Volume tells us how many
options actually traded that day

00:01:14.483 --> 00:01:17.533
and open interest, which is
something that you're probably

00:01:17.533 --> 00:01:19.918
not familiar with if you've
only looked at stock quotes,

00:01:19.918 --> 00:01:24.948
tells us how many actual, open
options contracts of that type

00:01:24.948 --> 00:01:28.168
are actually in existence. So
if you look right over here,

00:01:28.168 --> 00:01:33.494
this tells us that there are
399 open con ... open call

00:01:33.494 --> 00:01:40.742
options with a $14 stock ...
strike price at an April 2011

00:01:40.742 --> 00:01:43.850
expiration on General Electric.

00:01:43.850 --> 00:01:47.137
And it tells us that none
of those 399 open options

00:01:47.137 --> 00:01:48.733
actually traded that day.

00:01:48.733 --> 00:01:54.527
If any of these 399 options get
exercised, then it'll go down to 398.

00:01:54.527 --> 00:01:58.694
If someone writes a new option,
then it'll go up to 400.

00:01:58.694 --> 00:02:01.026
And the way it's listed here
is that the "in the money"

00:02:01.026 --> 00:02:04.361
options are listed in this
light blue color and that the

00:02:04.361 --> 00:02:06.880
"out of the money" options
don't get the light blue color.

00:02:06.880 --> 00:02:10.320
And so you can see the "in the
money" call options are the ones

00:02:10.320 --> 00:02:14.586
that have the strike price
below ... below today's

00:02:14.586 --> 00:02:19.603
current strike price. Because
if you had a call option for $17

00:02:19.603 --> 00:02:23.185
that gives you the right to buy GE for $17

00:02:23.185 --> 00:02:26.203
and if you exercise it
today, you'd buy it at $17

00:02:26.203 --> 00:02:29.535
and you could immediately
sell that stock for $18.95.

00:02:29.535 --> 00:02:33.178
So you would immediately
make $1.95 profit.

00:02:33.178 --> 00:02:36.011
And you could see right here
that the stock is or the

00:02:36.011 --> 00:02:38.804
option I should say, is actually
trading a little bit above that

00:02:38.804 --> 00:02:40.613
and that's because it has the optionality.

00:02:40.613 --> 00:02:43.469
You can definitely make $1.95 on it,

00:02:43.469 --> 00:02:44.947
but you might want to keep it around

00:02:44.947 --> 00:02:47.613
because you can potentially
get the upside on GE

00:02:47.613 --> 00:02:51.730
stock, up to the third Friday
of April 2011 while having a

00:02:51.730 --> 00:02:54.794
limited downside. The most you
could lose here is the price

00:02:54.794 --> 00:02:56.901
that you paid for your option.

00:02:56.901 --> 00:03:00.258
And then you can see the put
options that are in the money,

00:03:00.258 --> 00:03:04.206
are the ones that have a strike price
above the current trading price.

00:03:04.224 --> 00:03:08.724
If I had a $20 ... If I had a
put option with a $20 strike

00:03:08.724 --> 00:03:11.783
or a $20 exercise price, that
means that I could go out

00:03:11.783 --> 00:03:16.283
in the market today,
buy the stock for $18.95

00:03:16.283 --> 00:03:19.663
and then immediately sell it for $20.

00:03:19.663 --> 00:03:22.046
So I would make an immediate $1.05 profit

00:03:22.046 --> 00:03:24.330
and you could see here
that the option is trading

00:03:24.330 --> 00:03:29.033
for a little bit more than $1.05
because of the optionality.


Put-call parity clarification

WEBVTT
Kind: captions
Language: en

00:00:00.804 --> 00:00:04.543
Voiceover: We've seen that the
payoff diagram at option expiration

00:00:04.543 --> 00:00:09.615
for owning the stock
plus a put on that stock

00:00:09.615 --> 00:00:13.363
at some strike price
that this payoff diagram

00:00:13.363 --> 00:00:16.538
will look exactly the
same as the payoff diagram

00:00:16.538 --> 00:00:21.023
as owning a call option on that
stock at the same strike price

00:00:21.023 --> 00:00:25.069
as the put option plus a
bond that's going to be worth

00:00:25.069 --> 00:00:28.110
the strike price at
the time of expiration.

00:00:28.110 --> 00:00:29.471
One point of clarification

00:00:29.471 --> 00:00:31.784
and actually let me just
draw that payoff diagram

00:00:31.784 --> 00:00:33.611
just so you know what it looks like.

00:00:33.611 --> 00:00:39.275
So, if this is the underlying
stock price, stock price.

00:00:39.275 --> 00:00:41.076
And let's just do the payoff diagram

00:00:41.076 --> 00:00:45.658
when we look at the value of
the portfolio or your holdings.

00:00:46.135 --> 00:00:49.870
What it looks like is this is
the strike price over here.

00:00:49.870 --> 00:00:53.069
If the stock is at the stock
price or anything lower

00:00:53.069 --> 00:00:55.476
you make a fixed value

00:00:55.476 --> 00:00:58.077
and anything above that you
get some type of upside.

00:00:58.447 --> 00:01:00.863
So, either if you have
the stock or the put

00:01:00.863 --> 00:01:02.359
you have this type of a payoff

00:01:02.359 --> 00:01:04.855
or if you have the call plus the bond.

00:01:04.855 --> 00:01:07.536
The one point of
clarification I want to make

00:01:07.536 --> 00:01:11.402
is that you can only say that this
is definitely true for European.

00:01:11.695 --> 00:01:14.291
For European call options,

00:01:15.030 --> 00:01:17.061
for European options I
should say in general.

00:01:17.061 --> 00:01:18.803
European call and put options.

00:01:18.803 --> 00:01:22.404
Because only in European options
can you know for certain,

00:01:22.404 --> 00:01:26.942
for sure that the options are
going to be exercised on the ex

00:01:26.942 --> 00:01:30.202
or they can only be exercised
on the expiration date.

00:01:30.202 --> 00:01:31.806
If we're dealing with American options

00:01:31.806 --> 00:01:36.609
either party could either on
the put side or the call side

00:01:36.609 --> 00:01:39.946
could exercise their options earlier
so it becomes a lot more complicated.

00:01:39.946 --> 00:01:42.737
Normally when we kind of deal
with the mathematics of options

00:01:42.737 --> 00:01:44.806
we're dealing with European options.

00:01:44.806 --> 00:01:50.074
So, even in the example where we
did our put-call parity arbitrage

00:01:50.074 --> 00:01:52.140
where we're able to make that free $5,

00:01:52.140 --> 00:01:57.282
the implicit assumption I made is that
we were dealing with European options.

00:01:57.282 --> 00:02:02.133
That the options could only be
exercised at the expiration date.


China buys US bonds

WEBVTT
Kind: captions
Language: en

00:00:00.530 --> 00:00:02.630
In order to maintain
a trade imbalance

00:00:02.630 --> 00:00:05.430
we know that the Chinese
central government

00:00:05.430 --> 00:00:09.730
needs to keep its currency
artificially weak.

00:00:09.730 --> 00:00:13.180
And to do that they essentially
can print their currency

00:00:13.180 --> 00:00:17.130
and use that to buy US dollars.

00:00:17.130 --> 00:00:21.350
So what they do is they
increase the supply of yuan

00:00:21.350 --> 00:00:24.850
and they increase the
demand for dollars,

00:00:24.850 --> 00:00:27.110
keeping their currency weak.

00:00:27.110 --> 00:00:28.800
Now, the next
question you might ask

00:00:28.800 --> 00:00:31.990
is what do they do
with the actual dollars

00:00:31.990 --> 00:00:35.720
that they bought with the
yuan that they printed.

00:00:35.720 --> 00:00:39.080
Well, they don't want to
just sit on those dollars.

00:00:39.080 --> 00:00:41.870
They'd prefer to be collecting
some type of interest

00:00:41.870 --> 00:00:42.930
on that money.

00:00:42.930 --> 00:00:44.690
So instead of just
keeping it all in

00:00:44.690 --> 00:00:47.400
some warehouse
someplace they actually

00:00:47.400 --> 00:00:50.700
just lend that money
to the US government.

00:00:50.700 --> 00:00:55.060
And they lend that money by
buying US Treasury bonds,

00:00:55.060 --> 00:00:58.490
by buying T-bills and T-notes.

00:00:58.490 --> 00:01:02.340
So that money that they use that
they bought with their printed

00:01:02.340 --> 00:01:07.250
yuan, that goes to
the US Treasury.

00:01:07.250 --> 00:01:13.090
And the US Treasury gives the
Chinese Central Bank treasury

00:01:13.090 --> 00:01:13.590
bonds.

00:01:17.380 --> 00:01:21.040
So these are treasury bonds.

00:01:21.040 --> 00:01:22.500
Now, what's the effect of this?

00:01:22.500 --> 00:01:26.290
Clearly, the Bank of China is
getting interest on its money

00:01:26.290 --> 00:01:26.810
now.

00:01:26.810 --> 00:01:30.360
It's helping to finance
the US government's debt.

00:01:30.360 --> 00:01:33.860
But maybe even
more interestingly,

00:01:33.860 --> 00:01:43.040
it is creating incremental
demand for T-bonds,

00:01:43.040 --> 00:01:44.230
for treasury bonds.

00:01:44.230 --> 00:01:45.830
Now, what does that do?

00:01:45.830 --> 00:01:48.410
Well, if you're increasing
the demand for anything

00:01:48.410 --> 00:01:51.200
that's also going to
increase the price.

00:01:51.200 --> 00:01:56.790
So the price of treasury
bonds, of T-bills and T-notes,

00:01:56.790 --> 00:01:57.870
goes up.

00:01:57.870 --> 00:02:01.040
T-bills are durations
less than one year.

00:02:01.040 --> 00:02:03.140
Notes are durations
more than a year.

00:02:03.140 --> 00:02:04.320
So the price goes up.

00:02:04.320 --> 00:02:06.290
But what happens if
the price goes up?

00:02:06.290 --> 00:02:09.900
That means that the interest
that the government has

00:02:09.900 --> 00:02:13.360
to pay on this debt goes down.

00:02:18.440 --> 00:02:21.510
And I explained that in
more depth in other videos.

00:02:21.510 --> 00:02:22.860
Now, the interest goes down.

00:02:22.860 --> 00:02:25.560
That means that the cost of
borrowing for the US government

00:02:25.560 --> 00:02:26.430
goes down.

00:02:26.430 --> 00:02:28.120
But that's also
the benchmark rate

00:02:28.120 --> 00:02:30.590
for the cost of debt in general.

00:02:30.590 --> 00:02:34.120
So in general it finances US
debt, both of the government

00:02:34.120 --> 00:02:36.920
and really just
credit more broadly.

00:02:36.920 --> 00:02:45.270
So debt becomes cheaper
inside of the United States.

00:02:45.270 --> 00:02:49.790
This is Salman Kahn from
the Khan Academy for CNBC.


Review of China US currency situation

WEBVTT
Kind: captions
Language: en

00:00:00.600 --> 00:00:04.300
Let's review how China can
maintain a trade imbalance

00:00:04.300 --> 00:00:06.720
with the United
States by artificially

00:00:06.720 --> 00:00:09.840
keeping its currency weak.

00:00:09.840 --> 00:00:12.260
So we had a simplified
scenario where

00:00:12.260 --> 00:00:16.340
we had an exchange
rate of 6 yuan per $1.

00:00:16.340 --> 00:00:19.920
We had a Chinese manufacturer
selling $50 million

00:00:19.920 --> 00:00:23.260
worth of microwaves
in the United States.

00:00:23.260 --> 00:00:27.150
We had a US software
producer selling $20 million

00:00:27.150 --> 00:00:30.050
worth of software in China.

00:00:30.050 --> 00:00:34.160
If we had a floating exchange
rate, the supply of dollars

00:00:34.160 --> 00:00:37.100
is much greater than
the demand for dollars.

00:00:37.100 --> 00:00:39.920
So the dollar would
become weaker.

00:00:39.920 --> 00:00:44.050
It would become weaker, and
the yuan would become stronger.

00:00:44.050 --> 00:00:46.300
And that would resolve
the trade imbalance

00:00:46.300 --> 00:00:48.100
We saw that the
People's Bank of China

00:00:48.100 --> 00:00:50.120
does not want that to happen.

00:00:50.120 --> 00:00:54.720
So what they do is they
artificially create

00:00:54.720 --> 00:00:57.130
demand for dollars
to keep it strong.

00:00:57.130 --> 00:01:00.550
They do that by essentially just
printing yuan and converting it

00:01:00.550 --> 00:01:01.110
to dollars.

00:01:01.110 --> 00:01:04.700
And that obviously also
increases the supply of yuan,

00:01:04.700 --> 00:01:06.880
so it makes that less expensive.

00:01:06.880 --> 00:01:09.494
It weakens the yuan,
strengthens the dollar.

00:01:09.494 --> 00:01:10.910
Now, they're not
just going to sit

00:01:10.910 --> 00:01:14.040
on literally cash with
those dollar bills.

00:01:14.040 --> 00:01:16.090
They'll actually want
to lend to them out.

00:01:16.090 --> 00:01:22.350
So what this does is it
increases the supply of money

00:01:22.350 --> 00:01:25.670
for loans, supply of loans.

00:01:25.670 --> 00:01:28.980
Well, if you increase the amount
of dollars that can be lent,

00:01:28.980 --> 00:01:32.580
that's going to lower the
cost of borrowing dollars.

00:01:32.580 --> 00:01:37.861
So the effect is you are
lowering borrowing costs.

00:01:37.861 --> 00:01:40.110
And if you're lowering
borrowing costs that just means

00:01:40.110 --> 00:01:44.160
interest is less, and it's
easier to use your credit card,

00:01:44.160 --> 00:01:45.850
either if you're
the US government

00:01:45.850 --> 00:01:48.090
or if you're the US consumer.

00:01:48.090 --> 00:01:55.590
Now, if debt becomes cheaper or
we have lower interest rates--

00:01:55.590 --> 00:01:58.050
If you have a lower interest
rate on your credit card

00:01:58.050 --> 00:02:00.375
that means that you're
just going to consume more.

00:02:04.000 --> 00:02:06.361
So the end result,
the big picture

00:02:06.361 --> 00:02:08.610
of what's happening here,
in order to maintain a trade

00:02:08.610 --> 00:02:10.419
imbalance, in order
to keep its currency

00:02:10.419 --> 00:02:16.080
peg, you have the Chinese
Central Bank essentially

00:02:16.080 --> 00:02:18.260
printing money,
converting it to dollars,

00:02:18.260 --> 00:02:21.557
and then lending that to the
US government and consumer,

00:02:21.557 --> 00:02:23.140
and what are they
going to do with it?

00:02:23.140 --> 00:02:24.640
Essentially, they're
going to end up

00:02:24.640 --> 00:02:26.460
buying more Chinese goods.

00:02:26.460 --> 00:02:28.230
In our simplified
example, they'll

00:02:28.230 --> 00:02:30.840
buy even more microwaves.

00:02:30.840 --> 00:02:34.568
This is Salman Khan of
the Khan Academy for CNBC.


Data on Chinese M1 Increase in 2010

WEBVTT
Kind: captions
Language: en

00:00:00.560 --> 00:00:04.510
We've talked a good bit about
how the Chinese government is

00:00:04.510 --> 00:00:08.560
printing yuan to buy a
foreign exchange to keep

00:00:08.560 --> 00:00:09.932
the yuan devalued.

00:00:09.932 --> 00:00:11.390
But what I want to
do in this video

00:00:11.390 --> 00:00:13.098
is actually look at
the data and show you

00:00:13.098 --> 00:00:15.160
that I wasn't making
all of that stuff up.

00:00:15.160 --> 00:00:19.520
So this is actually data from
the People's Bank of China.

00:00:19.520 --> 00:00:22.800
This is directly
from their website.

00:00:22.800 --> 00:00:25.680
And right over here, this
is the 2010 money supply.

00:00:25.680 --> 00:00:27.420
This is the 2009 money supply.

00:00:27.420 --> 00:00:30.160
You can get any money supply,
any year that you want,

00:00:30.160 --> 00:00:31.310
from their site.

00:00:31.310 --> 00:00:33.890
And what we could do is just
look at what happened over just

00:00:33.890 --> 00:00:37.700
even 2010, or from a
same point in '09 to '10.

00:00:37.700 --> 00:00:41.240
Let me take November '09 to
November '10, and I'll look

00:00:41.240 --> 00:00:43.790
at their M1 money supply.

00:00:43.790 --> 00:00:47.652
I'll look at their
M1 money supply.

00:00:47.652 --> 00:00:49.110
I'm going from
November to November

00:00:49.110 --> 00:00:51.620
because we'll see some
of the other charts,

00:00:51.620 --> 00:00:52.960
we actually have data for there.

00:00:52.960 --> 00:00:54.376
We don't have
December to December

00:00:54.376 --> 00:00:56.930
for some of the other charts
I'm going to use in this video.

00:00:56.930 --> 00:00:58.490
But it just gives
the general idea.

00:00:58.490 --> 00:01:04.170
If you go from November of 2009,
the M1 money supply, now this

00:01:04.170 --> 00:01:06.320
is in hundred million yuan.

00:01:06.320 --> 00:01:10.509
So there was a 212,493
hundred million yuan.

00:01:10.509 --> 00:01:12.300
And we'll try to convert
these into numbers

00:01:12.300 --> 00:01:13.880
that make a little
bit more sense.

00:01:13.880 --> 00:01:17.530
And then you fast forward
to November of 2010, the M1

00:01:17.530 --> 00:01:22.839
is 259,420 hundred million yuan.

00:01:22.839 --> 00:01:24.380
So if we-- let's
get a calculator out

00:01:24.380 --> 00:01:26.730
and actually make
some sense of that.

00:01:26.730 --> 00:01:34.310
So a year later, it's
at 259,420 and from that

00:01:34.310 --> 00:01:41.110
let's subtract what it
was before, 212,493.

00:01:41.110 --> 00:01:44.170
So the difference is 46,927.

00:01:44.170 --> 00:01:46.390
Now this is in
hundred million yuan.

00:01:46.390 --> 00:01:48.480
So if you wanted
it in million yuan,

00:01:48.480 --> 00:01:49.702
you want to multiply by 100.

00:01:49.702 --> 00:01:51.660
I think it's pronounced
"you-wen" or "you-won."

00:01:51.660 --> 00:01:53.845
I'm not a Chinese
pronunciation expert.

00:01:58.200 --> 00:01:59.990
This is in millions of yuan.

00:01:59.990 --> 00:02:01.470
And now if we wanted
it in billions

00:02:01.470 --> 00:02:03.770
we can divide this by 1,000.

00:02:03.770 --> 00:02:06.080
So let's divide this by 1,000.

00:02:06.080 --> 00:02:10.020
So it's roughly
4.6, 4.7 trillion

00:02:10.020 --> 00:02:13.080
yuan increase in
their M1 money supply

00:02:13.080 --> 00:02:16.530
from November, 2009
to November, 2010.

00:02:16.530 --> 00:02:18.350
Sort of a pretty
dramatic increase.

00:02:18.350 --> 00:02:21.560
And just so you could put
this in the scope of dollars

00:02:21.560 --> 00:02:24.530
I'll use a rough approximation
for the current exchange

00:02:24.530 --> 00:02:27.480
rate, 6.5 yuan per dollar.

00:02:27.480 --> 00:02:30.680
So let me just
divide that by 6.5

00:02:30.680 --> 00:02:33.900
to get a rough approximation for
what that would be in dollars.

00:02:33.900 --> 00:02:36.890
And we get $721-- remember
this was in billions-- so we're

00:02:36.890 --> 00:02:43.070
actually $722 billion expansion
in the M1 money supply of China

00:02:43.070 --> 00:02:47.279
from November, 2009
to November, 2010.

00:02:47.279 --> 00:02:48.820
In the next video,
we're going to see

00:02:48.820 --> 00:02:53.250
how this compares to the actual
increase in foreign exchange,

00:02:53.250 --> 00:02:54.827
or actually foreign assets.

00:02:54.827 --> 00:02:56.660
And we can see how much
of this was actually

00:02:56.660 --> 00:02:59.122
just to go and go buy
things from other countries,

00:02:59.122 --> 00:03:01.330
or buy foreign exchange from
other current countries,

00:03:01.330 --> 00:03:06.380
and essentially to keep
the Chinese yuan devalued.

00:03:06.380 --> 00:03:10.808
This is Salman Khan of
the Khan Academy for CNBC.


Data on Chinese Foreign Assets Increase in 2010

WEBVTT
Kind: captions
Language: en

00:00:00.660 --> 00:00:04.040
In the last video, we saw that
China had increased its M1

00:00:04.040 --> 00:00:10.050
money supply from November
of 2009 to November of 2010

00:00:10.050 --> 00:00:12.920
by roughly $700 billion.

00:00:12.920 --> 00:00:15.090
What I want to do in
this videos compare that

00:00:15.090 --> 00:00:17.450
to it's increase
in foreign assets.

00:00:17.450 --> 00:00:20.190
So if we move up here, and
once again, all of this data

00:00:20.190 --> 00:00:24.930
is straight from the website
of the Peoples Bank of China.

00:00:24.930 --> 00:00:26.929
And this is the URL
right over here.

00:00:26.929 --> 00:00:28.720
And so you could get
it for multiple years.

00:00:28.720 --> 00:00:30.761
and actually they have a
ton of other statistics.

00:00:30.761 --> 00:00:33.020
And so this chart tells
us their foreign assets

00:00:33.020 --> 00:00:33.970
and foreign exchange.

00:00:33.970 --> 00:00:36.440
And I'm actually going to
focus on foreign assets,

00:00:36.440 --> 00:00:38.550
because when they
print currency,

00:00:38.550 --> 00:00:40.920
and that's to say with
their printed Yuan

00:00:40.920 --> 00:00:41.920
they go buy dollars.

00:00:41.920 --> 00:00:43.780
With that dollar they
could buy-- well,

00:00:43.780 --> 00:00:45.030
they could keep it in dollars.

00:00:45.030 --> 00:00:46.520
They could buy treasury bonds.

00:00:46.520 --> 00:00:49.380
Or they could just
go buy US assets.

00:00:49.380 --> 00:00:53.040
So assets are the best
measure of what they're

00:00:53.040 --> 00:00:56.430
holding that is denominated
in other currencies.

00:00:56.430 --> 00:01:00.170
So let's look at their
growth from November of 2009

00:01:00.170 --> 00:01:01.760
to November of 2010.

00:01:01.760 --> 00:01:03.230
And this is why I
picked November,

00:01:03.230 --> 00:01:06.830
because we didn't have
December of 2010 in this chart.

00:01:06.830 --> 00:01:08.480
So foreign assets,
and once again,

00:01:08.480 --> 00:01:10.696
this is in hundred million Yuan.

00:01:10.696 --> 00:01:16.410
Foreign assets in November,
2009 183,651, and that's

00:01:16.410 --> 00:01:17.970
in 100 million Yuan.

00:01:17.970 --> 00:01:24.600
And then you fast forward to
November, 2010 it is 212,733.

00:01:24.600 --> 00:01:27.619
So let's, once again,
put that in terms

00:01:27.619 --> 00:01:29.410
that make a little bit
more sense, at least

00:01:29.410 --> 00:01:31.820
for someone who's
used to dollars.

00:01:31.820 --> 00:01:33.400
And I used a very
rough approximation

00:01:33.400 --> 00:01:36.200
for the US Yuan exchange
rate in the last video.

00:01:36.200 --> 00:01:37.870
It's actually
closer to 6.58 now.

00:01:37.870 --> 00:01:40.050
But it gets us to about
$700 billion increase

00:01:40.050 --> 00:01:42.157
in money supply that we
got in the last video.

00:01:42.157 --> 00:01:43.240
Now, let's check this out.

00:01:43.240 --> 00:01:50.960
So we end up at 212,733
hundred million Yuan

00:01:50.960 --> 00:02:00.700
in foreign assets, November,
2010 minus 183,651.

00:02:00.700 --> 00:02:02.250
So that's the difference.

00:02:02.250 --> 00:02:04.200
Now this is in
hundred million Yuan.

00:02:04.200 --> 00:02:06.330
So let's multiply by 100.

00:02:06.330 --> 00:02:08.199
And so this will
be in million Yuan.

00:02:08.199 --> 00:02:13.720
Now if we divide this by 1,000
this will give us billion Yuan.

00:02:13.720 --> 00:02:17.490
So it's actually close to--
its 2,900 billion Yuan.

00:02:17.490 --> 00:02:19.406
So it's almost
three trillion Yuan.

00:02:19.406 --> 00:02:21.280
And if we want to convert
this into dollars--

00:02:21.280 --> 00:02:22.820
I'll just use the same 6.5.

00:02:22.820 --> 00:02:24.100
I could use 6.58.

00:02:24.100 --> 00:02:26.030
Oh, let me just do 6.58.

00:02:26.030 --> 00:02:31.310
So divided by 6.58, to put it
into billions of US dollars.

00:02:31.310 --> 00:02:36.070
So you see that there
is a $440 billion

00:02:36.070 --> 00:02:40.280
increase in foreign assets
when denominated in dollars.

00:02:40.280 --> 00:02:41.720
So let's think about that.

00:02:41.720 --> 00:02:42.930
So let's think about this.

00:02:42.930 --> 00:02:54.550
M1, so from November,
2009 to November, 2010 M1

00:02:54.550 --> 00:03:01.490
was up by approximately
$700 billion.

00:03:01.490 --> 00:03:06.659
And the foreign assets
were up by approximately,

00:03:06.659 --> 00:03:08.450
what was that number
that I just had there?

00:03:08.450 --> 00:03:10.395
Approximately $440 billion.

00:03:13.240 --> 00:03:16.230
So most of the expansion
of their monetary base,

00:03:16.230 --> 00:03:20.200
of their M1 base, was to go
out and buy foreign assets

00:03:20.200 --> 00:03:22.480
over the course of 2010.

00:03:22.480 --> 00:03:24.890
And the balance is really
just to kind of support

00:03:24.890 --> 00:03:27.140
the growth of the
actual Chinese economy.

00:03:27.140 --> 00:03:30.050
But most of it is to go out
there, buy foreign assets

00:03:30.050 --> 00:03:34.050
in other currencies,
and actually help

00:03:34.050 --> 00:03:36.460
keep the Yuan devalued.

00:03:36.460 --> 00:03:40.530
This is Salman Khan of
the Khan Academy for CNBC.


Data on Chinese US Balance of Payments

WEBVTT
Kind: captions
Language: en

00:00:00.500 --> 00:00:03.190
I used simplified
numbers when we first

00:00:03.190 --> 00:00:06.210
thought about how the Chinese
government can intervene

00:00:06.210 --> 00:00:08.710
in foreign currency markets to
keep their currency devalued.

00:00:08.710 --> 00:00:10.709
What I want to do this
video is to actually look

00:00:10.709 --> 00:00:12.250
at some of the real numbers.

00:00:12.250 --> 00:00:15.960
So this is from the US Bureau
of Economic Analysis, bea.gov.

00:00:15.960 --> 00:00:20.520
This is the URL where I
actually got this data.

00:00:20.520 --> 00:00:22.610
And this right over
here is the US balance

00:00:22.610 --> 00:00:24.130
of payments relative to China.

00:00:24.130 --> 00:00:27.620
And this part right over
here is the current account,

00:00:27.620 --> 00:00:31.130
which really tells us the
imports verses exports.

00:00:31.130 --> 00:00:33.730
And this over here is
the capital account,

00:00:33.730 --> 00:00:36.320
sometimes called the
financial account,

00:00:36.320 --> 00:00:38.980
depending on how you
are accounting for it.

00:00:38.980 --> 00:00:41.830
And this tells us about
inflow or the outflow

00:00:41.830 --> 00:00:43.840
of ownership of assets.

00:00:43.840 --> 00:00:45.555
So this is goods,
this is assets.

00:00:45.555 --> 00:00:47.430
You could think of it's
money, or securities,

00:00:47.430 --> 00:00:48.962
or other things like that.

00:00:48.962 --> 00:00:49.670
Now you can look.

00:00:49.670 --> 00:00:54.370
From 2006 we did
export some things

00:00:54.370 --> 00:00:57.590
to China. $72 billion
worth in 2006,

00:00:57.590 --> 00:00:58.950
this is in millions of dollars.

00:00:58.950 --> 00:01:01.170
So $72,000 is $72 billion.

00:01:01.170 --> 00:01:03.780
Increased to $85
billion, $95 billion.

00:01:03.780 --> 00:01:07.070
Stayed at $95 billion in 2009.

00:01:07.070 --> 00:01:11.460
But the United States imported
a ton more, $330 billion.

00:01:11.460 --> 00:01:13.740
$330 billion in 2006.

00:01:13.740 --> 00:01:16.400
$380 billion in 2007.

00:01:16.400 --> 00:01:18.540
Almost $400 billion in 2009.

00:01:18.540 --> 00:01:24.560
So we're running almost a $300
billion trade deficit in 2008

00:01:24.560 --> 00:01:25.440
relative to China.

00:01:25.440 --> 00:01:28.220
And then in 2009 it
goes down a little bit.

00:01:28.220 --> 00:01:32.440
This looks like about $260
billion trade deficit.

00:01:32.440 --> 00:01:35.360
And that's really just
because we imported,

00:01:35.360 --> 00:01:38.535
or the United States
imported, fewer goods.

00:01:38.535 --> 00:01:40.160
And to a large degree
that was probably

00:01:40.160 --> 00:01:46.370
because of the US recession
where consumption in general,

00:01:46.370 --> 00:01:47.310
slowed down.

00:01:47.310 --> 00:01:49.480
So we would have bought
fewer goods and services

00:01:49.480 --> 00:01:52.800
from pretty much anyone,
including ourselves or China.

00:01:52.800 --> 00:01:54.610
Now you can see
that being offset

00:01:54.610 --> 00:01:55.730
in the financial account.

00:01:55.730 --> 00:01:57.720
This, to some degree,
tells the story.

00:01:57.720 --> 00:02:00.459
It done give us the full
story, of the Chinese.

00:02:00.459 --> 00:02:02.250
And this isn't just
the Chinese government.

00:02:02.250 --> 00:02:05.150
This is all Chinese
ownership, that they

00:02:05.150 --> 00:02:07.930
are increasing their
ownership of US assets.

00:02:07.930 --> 00:02:12.920
And those assets, they could
be US Treasury notes and bills.

00:02:12.920 --> 00:02:14.430
These could be US stocks.

00:02:14.430 --> 00:02:16.680
This could be US real estate.

00:02:16.680 --> 00:02:19.880
But you can see each year,
and this is the increase,

00:02:19.880 --> 00:02:24.580
Americans are buying assets
in China. $5 billion in 2006,

00:02:24.580 --> 00:02:29.310
$2 billion in 2007, $12 billion
in 2008, $18 billion in 2009.

00:02:29.310 --> 00:02:32.350
To some degree this is
limited by restrictions

00:02:32.350 --> 00:02:34.796
imposed by the
Chinese government.

00:02:34.796 --> 00:02:36.170
But you could see
the Chinese are

00:02:36.170 --> 00:02:38.380
buying way more
assets in the US.

00:02:38.380 --> 00:02:42.700
And this really kind of is part
of that picture of the Chinese,

00:02:42.700 --> 00:02:44.450
especially the Chinese
central government,

00:02:44.450 --> 00:02:45.810
is buying US assets.

00:02:45.810 --> 00:02:47.960
To do that, they
have to buy dollars

00:02:47.960 --> 00:02:50.590
with yen, which keeps
the dollar strong

00:02:50.590 --> 00:02:52.840
and allows their
currency to stay weak,

00:02:52.840 --> 00:02:56.070
wish to some degree allows--
or to a large degree-- allows

00:02:56.070 --> 00:03:00.180
this balance of the trade
deficit to stay where it is.

00:03:00.180 --> 00:03:02.230
Now, I'll leave you
with one conundrum.

00:03:02.230 --> 00:03:05.410
To a large degree these
numbers right here,

00:03:05.410 --> 00:03:08.290
they are offsetting the
trade deficit, and especially

00:03:08.290 --> 00:03:11.862
in 2008, the Chinese bought way
more US assets than actually

00:03:11.862 --> 00:03:12.820
even the trade deficit.

00:03:12.820 --> 00:03:14.610
They more than made up for it.

00:03:14.610 --> 00:03:16.840
But in 2009, you
don't see them buying

00:03:16.840 --> 00:03:20.100
enough to make up for
the trade deficit.

00:03:20.100 --> 00:03:22.200
They bought $143 billion.

00:03:22.200 --> 00:03:24.910
And actually on a net basis,
it'll probably be about $120

00:03:24.910 --> 00:03:26.730
something billion,
which doesn't make up

00:03:26.730 --> 00:03:28.830
for the whole $260 billion.

00:03:28.830 --> 00:03:31.617
So how did they still keep
their currency pegged?

00:03:31.617 --> 00:03:33.950
And the answer, and we'll
look at that into more detail,

00:03:33.950 --> 00:03:37.640
is they don't have to
directly buy US assets.

00:03:37.640 --> 00:03:40.010
They could buy assets, or
they could buy currency

00:03:40.010 --> 00:03:41.260
from another country.

00:03:41.260 --> 00:03:44.440
And that will put upward
pressure on that currency.

00:03:44.440 --> 00:03:47.410
So let me put it over here.

00:03:47.410 --> 00:03:50.570
China could go and
buy US currency.

00:03:50.570 --> 00:03:53.610
Or it could go to
another country

00:03:53.610 --> 00:03:56.580
and buy their
currency, country A.

00:03:56.580 --> 00:03:58.460
And then country A is
going to feel pressure.

00:03:58.460 --> 00:04:00.622
It's currency is going
to go up in value.

00:04:00.622 --> 00:04:03.080
And it doesn't want that because
that would hurt its trade.

00:04:03.080 --> 00:04:08.090
So then it might go and buy
US assets to keep it devalued.

00:04:08.090 --> 00:04:09.910
And that would not
show up in that chart.

00:04:09.910 --> 00:04:12.620
But we'll look at that
in the next video.

00:04:12.620 --> 00:04:15.940
This is Salman Khan of
the Khan Academy for CNBC.


China keeps peg but diversifies holdings

WEBVTT
Kind: captions
Language: en

00:00:00.530 --> 00:00:03.560
We know the US is running
a relatively large trade

00:00:03.560 --> 00:00:06.230
deficit relative
to China in 2009.

00:00:06.230 --> 00:00:13.490
We imported $260 billion more
than we exported to China.

00:00:13.490 --> 00:00:15.460
And we know from
the last few videos

00:00:15.460 --> 00:00:18.390
that the way that China
is keeping their currency

00:00:18.390 --> 00:00:20.860
from appreciating because
of this trade imbalance

00:00:20.860 --> 00:00:23.890
is that they're going out
there, printing money, and using

00:00:23.890 --> 00:00:27.610
that yuan to buy dollar assets.

00:00:27.610 --> 00:00:31.520
And we see over here
in 2006, 2007, 2008,

00:00:31.520 --> 00:00:34.260
major increases in US assets.

00:00:34.260 --> 00:00:36.060
But what's a little
bit more interesting

00:00:36.060 --> 00:00:39.200
is that, in 2009, we didn't
have a huge increase.

00:00:39.200 --> 00:00:42.170
It's pretty large by any
standard, but not large enough

00:00:42.170 --> 00:00:44.750
to offset the actual
trade imbalance.

00:00:44.750 --> 00:00:47.000
So how did China keep
its currency peg?

00:00:47.000 --> 00:00:50.000
Even better, let's actually look
at-- because this isn't just

00:00:50.000 --> 00:00:51.320
the Chinese government.

00:00:51.320 --> 00:00:56.720
These are just ownership of US
assets by Chinese nationals.

00:00:56.720 --> 00:00:59.840
But we can actually look at
the major foreign holders

00:00:59.840 --> 00:01:01.100
of treasury securities.

00:01:01.100 --> 00:01:04.879
This actually comes from
the Treasury's own website.

00:01:04.879 --> 00:01:08.560
And it tells us how much
different central banks,

00:01:08.560 --> 00:01:12.830
how many the treasury securities
they are actually holding.

00:01:12.830 --> 00:01:16.370
And you can see China
is the biggest holder.

00:01:16.370 --> 00:01:21.850
If you go to November of
2009, it has $929 billion.

00:01:21.850 --> 00:01:23.330
This is the People's
Bank of China.

00:01:23.330 --> 00:01:29.080
It has $929 billion
worth of US treasuries.

00:01:29.080 --> 00:01:31.450
But what's interesting here,
it is the largest holder,

00:01:31.450 --> 00:01:35.900
but as we go from November
of 2009 to November of 2010

00:01:35.900 --> 00:01:38.300
their holdings
actually went down.

00:01:38.300 --> 00:01:39.280
Not by a ton.

00:01:39.280 --> 00:01:41.300
They're still right
around $900 billion.

00:01:41.300 --> 00:01:43.000
But they went down.

00:01:43.000 --> 00:01:45.840
So given the fact that we
have this trade deficit, given

00:01:45.840 --> 00:01:48.242
the fact that they want
to peg their currency,

00:01:48.242 --> 00:01:49.950
and that they want to
print money, and go

00:01:49.950 --> 00:01:52.700
buy other people's assets,
how did this happen?

00:01:52.700 --> 00:01:56.050
How did the number of
treasuries actually go down?

00:01:56.050 --> 00:02:00.420
And actually how were they able
to reduce the amount of all US

00:02:00.420 --> 00:02:03.040
assets that they bought?

00:02:03.040 --> 00:02:05.150
Now, the treasury
answer is they don't

00:02:05.150 --> 00:02:06.570
have to just buy treasuries.

00:02:06.570 --> 00:02:09.470
They could by other US
assets, but even over here we

00:02:09.470 --> 00:02:12.980
saw that they didn't buy
a ton of other US assets.

00:02:12.980 --> 00:02:15.170
And a clue to what's
happening here,

00:02:15.170 --> 00:02:17.790
and this isn't exactly
what's necessarily happening,

00:02:17.790 --> 00:02:20.460
it's far more complicated than
I could explain in one video,

00:02:20.460 --> 00:02:23.930
is that we do see other
countries whose US Treasury

00:02:23.930 --> 00:02:25.550
holdings are
increasing dramatically

00:02:25.550 --> 00:02:27.630
over the course of 2010.

00:02:27.630 --> 00:02:31.850
In particular, you see
the United Kingdom.

00:02:31.850 --> 00:02:36.930
Their holdings have grown from
$155 billion to $500 billion

00:02:36.930 --> 00:02:38.800
over the course of 2010.

00:02:38.800 --> 00:02:39.675
And this is relative.

00:02:39.675 --> 00:02:43.390
The United Kingdom does not have
a significant trade imbalance

00:02:43.390 --> 00:02:45.550
one way or the other
with the United States.

00:02:45.550 --> 00:02:49.830
And we actually see we actually
see that it's currency really

00:02:49.830 --> 00:02:52.520
didn't change much over
the course of 2010.

00:02:52.520 --> 00:02:54.920
It's been about the same.

00:02:54.920 --> 00:02:57.750
And this looks more
dramatic than it really is.

00:02:57.750 --> 00:03:00.430
So the answer, and it could
be much more complicated

00:03:00.430 --> 00:03:03.770
than this, is that China has
decided to somewhat diversify

00:03:03.770 --> 00:03:07.950
from buying US treasuries,
and in particular US assets.

00:03:07.950 --> 00:03:10.960
And maybe they're diversifying
to the pound sterling,

00:03:10.960 --> 00:03:12.970
maybe they're
diversifying to the Euro.

00:03:12.970 --> 00:03:17.890
And so they will start
buying, say, British assets.

00:03:17.890 --> 00:03:19.860
But the British don't
want their currency

00:03:19.860 --> 00:03:21.750
to appreciate too much
because then they'll

00:03:21.750 --> 00:03:23.890
suffer trade consequences.

00:03:23.890 --> 00:03:25.730
Their goods will
be too expensive.

00:03:25.730 --> 00:03:27.550
And so the British
Central Bank would then

00:03:27.550 --> 00:03:29.990
want to maybe, so that
their currency does not

00:03:29.990 --> 00:03:31.810
appreciate relative
to the dollar,

00:03:31.810 --> 00:03:35.034
they'll want to go and
buy American assets.

00:03:35.034 --> 00:03:37.200
And that's what it looks
like is actually happening.

00:03:37.200 --> 00:03:40.370
And maybe one other small point
is that the Chinese government

00:03:40.370 --> 00:03:43.960
has slowly allowed its
currency to appreciate.

00:03:43.960 --> 00:03:46.534
But the appreciation
isn't as dramatic

00:03:46.534 --> 00:03:47.700
as this chart makes it look.

00:03:47.700 --> 00:03:53.970
This is 6.8 yuan to the dollar
at the beginning of 2010

00:03:53.970 --> 00:03:55.787
to about 6.6.

00:03:55.787 --> 00:03:57.370
And we're not getting
close to 0 here.

00:03:57.370 --> 00:03:59.610
This is just from 6.8 to 6.6.

00:03:59.610 --> 00:04:01.110
But over the last
several years they

00:04:01.110 --> 00:04:04.090
have slowly been allowing
their currency to appreciate.

00:04:04.090 --> 00:04:07.150
But what's really happening is
that they're diversifying away

00:04:07.150 --> 00:04:08.734
from dollar assets.

00:04:08.734 --> 00:04:10.400
But when they buy
those other currencies

00:04:10.400 --> 00:04:12.858
those people are going to want
to buy dollar assets to keep

00:04:12.858 --> 00:04:15.910
their currency from
moving too much.