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Interest Options – Calculating Premium

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Interest Options – Calculating Premium

  • This topic has 3 replies, 2 voices, and was last updated 3 months ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 1, 2022 at 4:39 pm #654724
    Yousuf9
    • Topics: 2
    • Replies: 2
    • ☆

    Hi,

    I noticed that while calculating premium in interest rate options question “Massie” we calculate as per below:
    (Strike Rate x Tick Value x Number of Contracts)
    While in question “Alecto” and “Awan” we calculate as per below:
    (Strike Rate x Tick Value x Number of Contracts x Time.. ie 5/12)

    Can you please elaborate the difference ?

    Thanks,

    May 1, 2022 at 5:41 pm #654732
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49927
    • ☆☆☆☆☆

    There is no difference.

    The premium is always calculated in either of two ways (which both obviously give the same answer).
    It is either the number of contracts x the tick value x the premium from the table (the way used in Massie and in Alecto)
    or
    it is the number of contracts x the contract size x the premium from the table x 3/12 (the way used in Awan). In this way it is always 3/12 because they are always 3 month futures on which the options are being used.

    I do suggest that you watch my free lectures on the management of interest rate risk. I prefer not to use tick values in any of the calculations (and you never need to use them in the exam – that is your choice), but I do explain them in detail.

    May 1, 2022 at 9:48 pm #654739
    Yousuf9
    • Topics: 2
    • Replies: 2
    • ☆

    Thank you very much sir!

    Noticed also we need to divide the premium from the table by 100 if we opt for option 2.

    May 2, 2022 at 7:07 am #654749
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49927
    • ☆☆☆☆☆

    Yes, but only because they are given as %’s in the table.

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