Number of Contracts

Discussion in 'SA6' started by Sauny Bean, Apr 19, 2011.

  1. Sauny Bean

    Sauny Bean Member

    There appears to be a contradiction in how to calculate the number of contracts for an equity future between exam papers.

    Q&A Bank 3.11 (which seemed to provide the inspiration for ST5 Sept 2010 paper, Q9), gives the No of contracts = Investment / (Quoted Price x Unit of Trading).
    Subject 401, September 2004, Paper 2, Q2(vii) examiners report says the No of contracts = Investment / Quoted Price. It ignores the unit of trading value, despite it being given in the question.

    I've had a quick look through my old ST5 notes and can't find a similar question. I presume the ST5 Sept 10 Q9 question gives the correct solution?
     
    Last edited by a moderator: Apr 19, 2011
    Sauny Bean, Apr 19, 2011
    #1
  2. Colin McKee

    Colin McKee ActEd Tutor Staff Member

    futures contracts

    Hi, I hadnt noticed how similar the SA6 2004 question, the SA6 Q&A bank question, and ST5 2010 question were to each other. I would agree that I usually think of the contracts being (Inveestment) / (unit of trading * future price). It may be altered up or down by the beta of the portfolio (hedge ratio) but this formula provides the basics. In the SA6 2004 question the examiner used the term "price" to mean the contract size. ie the price of 50,000 was the (future price * unit of trading). I would say this was unusual, and arguably wrong. I would expect the term price to relate to the quoted price of the future (eg 6,000 for the FTSE 100) and the term (notional contract size) to relate to the 6,000 * £10. I suppose the sheer size of the price in 2004 was a giveaway that it had to be the contract size rather than the price.
    I think that theoretically the correct hedge is (Investment) / (index value * unit of trading) where the "futures price" has been replaced by the "index value". These will be slightly different as the FTSE 100 future will not equal the FTSE100 index. But the two are extremely close and you use whatever is in the question.
     
    Colin McKee, Apr 20, 2011
    #2

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