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Hi
With regards to this question,
The premium on the options is given in annual %.
The options are only needed for 6 months.The answer that has been given takes the full premium for the whole annual %.
What is the reason why we have to pay the premium for the whole year despite only needing the option for half of the year?
The premiums are always stated in the table as annual percentages.
However the amount of the premium is always calculated for 3 months because they are always options on 3 month futures.
That is where the $25 tick value comes from for 1 tick movement on 1 contract:
1,000,000 x 0.01% x 3/12 = $25.Again, I explain all of this in my free lectures (and also why I never bother using ticks – you don’t need to use them in the exam and it doesn’t make it any easier 🙂 )
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