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premium on option

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › premium on option

  • This topic has 1 reply, 2 voices, and was last updated 11 years ago by John Moffat.
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  • May 27, 2014 at 11:12 pm #171319
    jess
    Member
    • Topics: 36
    • Replies: 19
    • ☆☆

    to calculate premium on option, for interest rate option, we have to multiply

    =no of contract x premium x size of contract

    Is this the answer for one year premium? do we have to multiply this answer by the (length of contract/12)?

    May 29, 2014 at 7:55 pm #171747
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Although the premium is expressed as an annual rate, it is always calculated as though it was for three months. So you take the number of contracts x contract size x premium x 1/400.

    However, remember that when deciding on the number of contracts you have to take into account the length of the loan.

    (If you are confused, then do watch my free lectures on this)

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