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Mr. John,
I have calculated the premium for Option on future contracts using the following approach.
At strike price of 96.00, $22m x 0.163% x 5/12 = $14,942
At strike price of 96.50, $22m x 0.581% x 5/12 = $53,258I couldn’t understand the workings given by the examiner. Could you please explain why premium for Option on future contracts are calculated as 16.3 x $25 x 37? Why 0.163% suddenly become 16.3?
It is because he has used ticks, and $25 is the tick value.
I do explain about ticks in my lectures, although (as I explain in the lectures) you do not need to ever use ticks to get the amount – that is up to you. I never bother using ticks 🙂
The value of the premium differs slightly when calculated using the premium % as opposed to using ticks.
Is it still okay to use the %’s instead of ticks?
No – the answer will be exactly the same however you calculate the premium.
If you found that to be a problem with a specific question then say which question and I will explain.
(I assume that you have watched my free lectures on foreign exchange risk management?)
This very question sir.
Re – watched the lecture and figured where u went wrong. Thank you so much 🙂
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