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Dear John,
When the question give these two figures, why the option premium be calculated without mulitiply with the time of month pro-rate by year, for example : if loan period in 4 months so the pro-rate : 4/12, pls. advise
This is explained in the free lectures!!
The tick value is itself the profit or loss for a movement of 1 tick (0.01) for 1 contract.
Option premiums are given in annual %’s (not in ticks) and are always multiplied by 3/12 because they are options on three months futures (nothing to do with the loan period) if calculating the $ cost of the premium. We account for the length of the borrowing by adjusting the number of contracts (if the loan is for 4 months then we multiply the loan by 4/3 to then decide how many option contracts we want).
When calculating the gain or loss on either futures (or using options on futures) then we either simply take the difference in the futures prices and divide by 100 (to give a %) and by 4 (because they are always 3 months futures). Alternatively you can state the difference in the futures prices as a number of ticks and multiply by the tick size – the tick size is 0.01 / 400 x the contract size.
I do really suggest that you watch our free lectures on interest rate risk management.
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