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John Moffat.
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Yousuf9
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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,
John Moffat
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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.
Yousuf9
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Thank you very much sir!
Noticed also we need to divide the premium from the table by 100 if we opt for option 2.
John Moffat
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Yes, but only because they are given as %’s in the table.
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