Files
ollama-model-training-5060ti/training_data/curated/text/bccd6e49b6901356275a34e27ebea16732ad36e80df1ee7b04649ea8e4d7c0eb.txt

37 lines
2.0 KiB
Plaintext
Raw Blame History

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