Quote from: DJ53 on April 12, 2017, 08:37:11 AM

Tempus, as I mentioned since the LKK1Y is a special Future with an upfront payment and a built in trigger option, actually it would be great if you could just ask someone technical in the Lykke team to explain the pricing model for the LKK1Y.

Might shed some light on why the price would go up more than the LKK itself.

Quote from: DJ53 on April 12, 2017, 08:28:30 AM

Contango is not just a concept for commodities (although it is mostly used to refer to them). It can also be applied to equity indexes where the storage costs are essentially zero however there is an associated time value of money (risk free interest rate) and possible dividends.

When the interest rate is higher than the dividend the market is in contango. We have been more or less in backwardation since the GFC in 2008 since the interest rates went to zero (or even negative in some countries) while the dividend yields actually rose in some cases.

https://www.quora.com/Are-S-P500-futures-in-contango-or-backwardation-through-most-of-their-history-Why-if-possible

However, you are correct in saying that contango does not apply straight off the bat to Lykke 1-year forward, its a bit more involved. You see the Lykke 1-Y is a forward which has an upfront payment whereas futures are usually settled at the expiration. So the cash flow timing is different. On top of that there is an option built into the Lykke 1Y forward, which is the trigger. The option should in theory have a premium the value of which will depend on the volatility of the underlying asset (which is the LKK), as this is used to measure the probability of the asset increasing or decreasing in price over a period of time.

In financial theory, to get the volatility of an asset you can calculate that from the option price and other variables.
However, in practice (in the markets) it works the other way round. What you have is the option price which is derived from the natural market forces of supply and demand and what you do is you back calculate the volatility (in which case it gets called as the implied volatility).

You see by having the Lkk1Y traded on the Lykke exchange, the Lykke team is essentially able to backcalculate the implied volatility. This is a much more accurate number than any volatility derived from theory using the black scholes or binary or any other option pricing model. So the Lykke team has been able to raise funds and at the same time cleverly able to derive the implied volatility - you need that to come up with pricing of other derivatives on Lykke they may need to list on the exchange in the future.

In short, I would expect the price of the LKK1Y to be higher than the Lkk merely due to the time value of money (measure by the risk free interest rate but complicated by the upfront payment) and the premium on the trigger option. Assuming dividend in the next 1 year will be zero which is a reasonable assumption to make for Lykke.

I guess that's how it is supposed to work anyways, however the guys at Lykke will be able to shed more light on the technical details.

Sorry for the long post, couldn't help it. My knowledge may be limited but trying to share what I know Cheesy

Quote from: tempus on April 12, 2017, 05:19:15 AM

Quote from: DJ53 on April 11, 2017, 11:11:59 PM

Guys that is easily explained and a real validation of the Lykke project.

The futures price can be above or below the spot price, when its above the spot price it is what in finance speak we call contango.

https://en.wikipedia.org/wiki/Contango

When an asset is in Contango it usually indicates the market view that the spot price (which is LKK in this case) in the future will move up.

Putting my finance & investment background to good use Wink

Quote from: tempus on April 11, 2017, 05:44:19 PM

Quote from: mtnsaa on April 11, 2017, 05:37:14 PM

Quote from: tempus on April 11, 2017, 05:34:42 PM

@mtnsaa: The LKK1Y-price results out of real demand. ;-)

But how can it be higher than LKK? That doesn't make any sense.

I have no idea tbh.. ;-)

Interesting! Didn't know "Contango". But I'm not so sure that applies here because if I get it right, Contango seems to be a situation that happens when it's about raw-material with certain costs (carrying, storage, loss) what is not the case for LKK.

Thanks! Very interesting! You clearly know much more about those things than I! ;-)

Sergey published an article about the pricing model for LKK1Y - maybe that already helps?

https://www.lykke.com/city/blog/what_is_lykke_forward

But I'll also link your post on the slack.