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Sir while I was doing some questions on interest rate risk I noticed dat for some questions premium and gain are divided pro rata (lik 3/12). But som questions won’t demand that. Can you please explain the logic behind that.!?
In Qn 80 of kaplan, ALECTO CO, wen calculating option premium and gain we didn’t do 3/12
But in Qn 82 kaplan, AWAN CO, we divided the gain and option premium by 3 /12. Can you plz explain the reason?I do not have the Kaplan book, however I have the questions because they are both past exam questions.
The premium is always calculated as 3/12 x premium from the table x number of contracts x contract size. This is because the premia are quoted in annual %’s but they are options on futures and they are three-month futures. 3/12 has been used in both answers.
The reason the 3/12 doesn’t show in the answer to Alecto is because the answer has used ticks. I tick is 0.01, and so the premium on 1 contract for 1 tick is $1,000,000 x 0.01% x 3/12 = $25. Therefore the total premium is the number of ticks (premium/0.01) x number of contracts x $25.
It is up to you whether or not to use ticks – the answer is the same either way. I never bother using ticks.
All of the above is explained in full in my free lectures on the management of interest rate risk.
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