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Eagle Watch: Financial Awareness for the Derivatives Era
Eagle Financial Advisory
Dear Investor, derivatives are more than just numbers on a screen; they are legally binding contracts driven by leverage. In this guide, we provide you with the scientific and practical insights needed to invest professionally, moving beyond mere guesswork.
1. The Golden Rule: Spot vs. Future
Do not be misled by the displayed price. Always remember:
Spot Price: Represents the current market reality.
Future Price: Represents Market Reality + Cost of Carry (Time Value).
The Trap: If you purchase a contract above the spot price, you are implicitly “borrowing” the interest cost. To profit, the market must rise by more than the “time premium” you paid.
2. Mark-to-Market (Daily Settlement)
In derivatives, accounts are settled daily.
Your profits or losses are transferred to and from your account every night after the market close.
Eagle’s Advice: Do not commit your entire liquidity to the “Initial Margin”. Always maintain a Liquidity Buffer to withstand daily volatility and avoid forced liquidation of your position.
3. Eagle’s Compass: Value at Risk (VaR)
Before opening any position, ask yourself: “What is my Maximum Potential Loss?”.
Using a 1:10 leverage means a 1% drop in the index results in a 10% loss of your capital.
Use the VaR Engine on the “Eagle” website to determine if your portfolio can withstand historical market “storms”.
4. Hidden Interest (Implicit Funding Cost)
The exchange will not send you an interest invoice, but the “Seller” ensures their interest is baked into the contract price.
The Basic Equation: Fair Contract Price = Index Price + (Bank Interest for the contract duration).
Any price above this is “Optimistic Risk,” while anything below is a “Hedging Opportunity”.
5. Eagle’s Five Commandments:
Do Not Follow the Herd: Collective optimism in derivatives is the fuel for seasoned professionals.
Time is Against You: The “Long” buyer fights time, as the contract value erodes as expiration approaches (Time Decay) unless the market moves strongly in their favor.
Leverage is a Double-Edged Sword: It magnifies profits but can “crush” your capital during market collapses.
Know Your Break-even Point: Calculate your commissions + implicit funding interest before claiming a profit.
Science Before Impulsiveness: Let the “Eagle” weekly report be your radar before making any decision.
Practical Case: When a Screen Profit is a Portfolio Loss
Suppose an investor buys an EGX30 index contract with the following data:
Current Spot Index: 44,000 points.
Future Price on Screen: 44,700 points (1-month duration).
Bank Interest Rate (r): 20% annually.
Step 1: Calculating the “Fair Price” Based on the Cost of Carry formula:
Implicit monthly interest ≈ 723 points.
Therefore, the Fair Price for the contract should be 44,723 points.
Step 2: The “Illusion of Profit” Scenario After one month, the Spot Index rises from 44,000 to 44,600 points (an excellent 600-point gain). The investor checks the screen and finds their contract (bought at 44,700) is now worth 44,600 due to Convergence.
The Shocking Result:
Market Movement: +600 points (Optimism).
Investor’s Account: -100 points loss (plus trading commissions).
Why the loss despite the market rise? The investor paid a “hidden funding cost” to the seller (the 700-point premium at the time of purchase). To truly profit, the index needed to rise by more than 723 points to cross the Break-even point