37 lines
2.0 KiB
Plaintext
37 lines
2.0 KiB
Plaintext
554 Part V: Index Options and Futures
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Commissions on futures are generally charged only when the position is closed
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out. Generally, a futures commission on an S&P 500 contract might be reduced to
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something like $10 per contract for this type of hedging. Since 185.00, the index
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value, represents 11500th of the value of the futures contract, we can reduce the
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futures commission to an index-related number by dividing the actual dollar com
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mission by 500. Thus, the futures commission is, in index terms, 10/500, or .02. The
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total commission for entering and exiting the position is thus 0.266 of index value,
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0.123 each for the purchase and sale of the stocks and .02 for the futures.
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Net profit = Futures
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price
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Futures fair Commission
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value costs
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= 188.50 - 187.00 - 0.27
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= 1.23
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This absolute net profit number can be converted into a rate of return by annualiz
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ing the profit and dividing by the current index price. Suppose that there are
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two months exactly remaining until expiration. Then the rate of return is computed
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as follows:
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Incremental = Net profit x ( 1/Time remaining)
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rate of return Index price
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1.23 X ( 12/2)
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185.00
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= 3.99%
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For the two-month time period, his return is about 2h of one percent.
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At first glance, a rate of return of almost 4% does not seem like much. But what
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we have computed here is an incremental rate of return. That is, this return is over
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and above whatever rate we used in determining the fair value of the futures. Thus,
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if an institution were going to invest its cash at the prevailing short-term rate, and that
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rate were used to determine the futures fair value in the above example, then the
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institution could earn an additional 4%, annualized, if it arbitraged the futures rather
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than put its money in the short-term money market.
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TRADE EXECUTION
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Most customers are not concerned with how the trades are executed, for they give
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the order to their broker and let him work out the details. However, for those who
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are interested in the actual trade execution, a short section dealing with that topic is
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in order. |