June 15 Q4 Daikon

You either divide the sell minus the buy price by 400 (which is what I always do!).

Or alternatively you use ticks, which gives the same answer.

For Dalton, the profit for a 1 tick movement on 1 contract is (0.01 x 1,000,000) / 400 = 25

So multiplying the number of ticks between the sell and the buy price (the number of 0.01 movements) by 25 and by the number of contracts, will give exactly the same answer as multiplying the difference between the sell and the buy price by the contract amount and dividing by 400.

You are welcome 🙂

All that is happening is that when a futures deal is entered into, you have to pay a pretty big deposit (the margin) to the dealer. At the end of the deal you get back the deposit plus any profit on the futures (or less any loss). It is to make sure that the dealer does not have the risk of you making a big loss but disappearing 🙂
(Otherwise I could ring a dealer and say ‘buy’ $1M futures and hope to make a big profit. But if things went wrong and I made a loss, then I could just run away 🙂 )

As the futures price changes from day to day, the dealer will calculate how much profit or loss is currently being made. If it is currently making a loss then you will be required to increase your deposit/margin by that amount; if it is currently making a profit then you can reduce your deposit/margin by that amount.

When the deal is finally closed, then you get back all the remaining deposit plus any final profit or less and final loss.

(This is in fact only the second time in the history of the exam that you have been required to actually show any calculations on this. Otherwise it has just been being aware (for written parts) that there is a margin and that it is adjusted from day-to-day).

sir i have watched all the lectures on interest rate swaps interest rate futures currency futures, and almost each and every lecture of p4 is worth watching. i m so blessed to have open tuitions support. otherwise self studying could be really tough. thankyou so much for the explanation.

Hello sir I solved this question without using ticks and exactly as you explained in your lecture pls tell me where am I going wrong:

actual loan int: 34m x 6/12 x (3.6+0.8+0.7)% = 867000
exercise options : 6 x 1m x ( 95.6 – 95.44)/400 ) = 27200 so NET result after premium = 867000 + 27200 – 51680 = 842520

why is this not giving the correct answer..ticks confuse me so Ive learnt by this method. pls help !