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Sir in lurgshell Co.’s (M/J 2019 sample paper) interest rate future options, we have got a gain on basis points of 0.44 and the examiner has calculated gain on option like this (0.0044 × $2m × 3/12 × 84) but I have solved it like this (0.44 × 100 × 25 × 84) where 25 is the tick value and (100 × 0.44 = 44) is the number of ticks, which is my usual practice.
So I want to know about the examiner’s logic behind his calculation and also that is my calculation correct or not, in this particular question?
As far as the examiners logic is concerned, I explain this in detail in my free lectures on foreign exchange risk management.
The reason what you have done does not give the same result is because the tick value in this case is not $25 (because the contract size is $2,000,000 in this question). The value of 1 tick is therefore 0.01 x 2,000,000 / 100 x 3/12 = $50 and not $25.
Again, I explain how the tick value is calculated in my free lectures (even though, as I state in the lectures, I never bother using ticks – they are never needed in exam questions (even if the value is given) and I find it faster not to use them 🙂 )
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