How To Calculate Futures Contracts – Notional value is a term often used in derivatives trading to refer to the valuation of an underlying asset. This can be the total value of the deviation, how much value the position controls, or the contract amount. This term is used to describe derivative contracts in the options, futures and currency markets.
In market parlance, the notional amount is the total principal amount of the derivative transaction. The nominal value of derivative contracts is much higher than the market value due to a concept called leverage.
How To Calculate Futures Contracts
Leverage allows you to theoretically control a much larger amount with a small amount. Thus, notional value helps distinguish between total transaction value and transaction value (or market value). There is a clear difference. face value represents the total value of a position, while market value is the price at which the position can be bought or sold in the market. The amount of leverage used can be calculated by dividing the face value by the market value.
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A contract has a unique, standardized size that can be based on factors such as weight, volume, or a multiplier. For example, one COMEX gold futures contract (GC) is 100 troy ounces, and the E-mini S&P 500 index futures contract has a multiplier of $50. The nominal value of the first is 100 times higher than the market price of gold, and the nominal value of the second is 50 times higher than the market price of the S&P 500 index.
If someone buys an E-mini S&P 500 contract at 2,800, that individual futures contract is worth $140,000 ($50 x 2,800). Therefore, $140,000 is the face value of this underlying futures contract. The person who buys this contract does not need to invest $140,000 when they close the deal.
Instead, they only have to deposit an amount called initial margin (market value), which is usually a fraction of the nominal amount. The leverage used will be the notional amount divided by the purchase price of the contract. If the price per contract (initial margin) was $10,000, the trader could use (140,000/10,000) 14x leverage.
Notional value is an integral part of portfolio risk assessment and can be very useful in determining hedging ratios to compensate for this risk. For example, a fund has $1,000,000 of long exposure to the US stock market, and the fund manager wants to offset that risk with E-mini S&P 500 futures. They must sell roughly the same amount of S&P 500 futures to hedge market exposure. Using the example above, each E-mini S&P 500 futures contract has a face value of $140,000 and a market value of $10,000.
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Thus, the fund manager would sell about 7 E-mini S&P 500 contracts to effectively hedge his long cash position against market risk. The market value (price) would be $70,000.
While notional value can be used in futures contracts and equities (the total value of an equity position) in the ways described above, notional value is also used for interest rate swaps, total return swaps, stock options and currency derivatives.
In interest rate swaps, the notional value is the value at which the interest payments will be exchanged. The notional value of interest rate swaps is used to determine the amount of interest payable. Typically, the face value of these types of contracts is determined during the term of the contract.
Total return swaps involve the customer paying a variable or fixed rate multiplied by the face value plus a drawdown of the face value. This is exchanged for payments to the other party, who pays an appreciation of the face value.
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For example, ABC trades for $20 and the ABC call option is worth $1.50. One stock option controls 100 shares of the underlying stock. The trader buys the option for $1.50 x 100 = $150.
The face value of the option is 20 x $100 = $2,000. Buying a stock option contract would give the potential seller control of one hundred shares for $150, compared to buying the stock outright for $2,000.
The notional value of a stock option contract is the value of the shares controlled, not the transaction value.
Currency derivatives, such as futures and options, have two denominations. Since these transactions involve two currencies, they both receive separate denominations. For example, if the exchange rate between the British Pound (GBP) and the United States Dollar (USD) is 1.5 at the time of the trade, then 1,000,000 USD is equivalent to 666,667 GBP.
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Futures contracts, a type of financial derivative, are contracts between two parties where they agree to sell their assets at a predetermined price at a future date.
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In futures contracts, the contract execution date is fixed, and the buyer and seller of the asset are obliged to buy and sell the commodity on the exact same day, regardless of the market price of the asset on that day. . This asset can be a commodity, cryptocurrency, stocks, bonds, etc.
A smaller version of futures contracts is attracting the interest of traders and investors in the crypto market: perpetual futures. So what exactly are these perpetual futures and why have they suddenly become so popular in the crypto world? Let’s understand the concept in this article.
1) True to their name, perpetual futures are a special, infinite series of forward futures that do not have a specific expiration date, meaning that traders, ie. the buyer and seller can hold the position for as long as they want.
2) As with futures contracts, where the buyer and seller are bound to complete the transaction on an agreed date, permanent futures contracts have no such rules or regulations and the transaction can be executed at any time as both wish. . participating customers depending on market conditions.
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3) Thus, forward contracts allow a seller to sell an asset when its price is likely to fall in the future, and a buyer can buy the asset if it is expected to rise in price in the future.
4) Permanent futures trading is based on the index price, which is calculated on the basis of the average price of the asset and its corresponding trading volume.
In order to take advantage of trading or to open a leveraged position for permanent futures trading, initial margin is the minimum amount that a trader must first pay. As we know this is called margin trading or leveraged trading. Margin trading allows a trader to trade more than they are entitled to. In this case, the trader deposits his margin instead of the margin amount that will be credited to his margin account. Once a trader reaches the eligibility level, he is allowed to trade on the stock exchange. When the trade is completed, it returns the margin amount with interest.
If the initial margin is the minimum amount that must be paid to open a position and a margin account, then the maintenance margin is the minimum balance that must be kept in the margin account to keep the trade open. The value of the maintenance margin changes depending on the market price of the insurance. It is necessary to maintain a minimum balance in the margin account
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