Derivatives Demystified by A.Chisholm. PDF

By A.Chisholm.

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The second column calculates the amount of dollars the company would receive for selling those pounds at that spot rate. 5 million. The final column calculates the margin achieved over the dollar costs. 5 then the US exporter will receive $15 million from selling the £10 million paid by its client. 5 million and the margin achieved (over the dollar costs incurred) is 11%. 0 Received ($) Profit or loss ($) Margin over cost (%) 10 000 000 11 000 000 12 000 000 13 000 000 14 000 000 15 000 000 16 000 000 17 000 000 18 000 000 19 000 000 20 000 000 −3 500 000 −2 500 000 −1 500 000 −500 000 500 000 1 500 000 2 500 000 3 500 000 4 500 000 5 500 000 6 500 000 −26 −19 −11 −4 4 11 19 26 33 41 48 Equity and Currency Forwards 17 the profit is $500 000 but the margin is well below target at approximately 4%.

In practice what happens is that (1) long and short positions are marked-to-market at the end of each trading day based on the closing price of the contract on the exchange, and (2) profits and losses from that day’s trading are added to or subtracted from a trader’s margin account. 5 and at the end of the day the contract closes exactly one tick above that value at 110-16. 625 One important point to stress is that the contract is written on a notional or imaginary US Treasury note. This is actually very helpful, since if it was based on a real bond the contract could not be traded after that security had expired.

The amount varies according to the type of contract and is based on a calculation of the maximum likely movement in the value of the futures contract during the course of a day. At the end of each day a trader’s margin account is adjusted in line with the closing price of the futures contract – a process called marking-to-market. If a trader has a long position – that is, has bought more contracts than he or she has sold – and the price has fallen, then the loss will be subtracted from the margin account.

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Derivatives Demystified by A.Chisholm.


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