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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 ?
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)
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.
Thank you very much sir!
Noticed also we need to divide the premium from the table by 100 if we opt for option 2.
Yes, but only because they are given as %’s in the table.