Question: How to calculate cost and margin of Futures Contracts?
How to calculate cost and margin of Futures Contracts?
In order to understand the mechanism of settlement of futures contracts, you need to take realistic examples of three trading instruments popular among traders: futures on crude oil WTI, traded on NYMEX under ticker symbol CL (Light Sweet Crude Oil WTI Futures); gold futures, trading in which takes place in the section COMEX under the ticker GC (Gold Futures); euro futures traded, under the ticker 6E (EUR / USD Futures).
1. The volume of the Contract
The volume of the Contract (or Contract Size, Contract Unit) is the quantity of the underlying asset in a single contract. The value is stated in the specification.
Crude oil: 1,000 barrels
Gold: 100 troy ounces
Euro 125,000 euro
2. Minimum pitch
Minimum pitch (or Min. Fluctuation, Min. Increment, Tick) is the minimum possible change in quotes. The values are stated in the specification.
Crude Oil: $ 0.01 per barrel
Gold: $ 0.10 per ounce
Euro $ 0.0001 per euro
3. Min. Step of Cost
Min. Step of Cost (or Tick Value) is a change in the trading account, which occurs at the minimum step of the contract. Sometimes it is stated in the specification.
MSC = Min. Step * Contract Volume
Crude Oil: $ 0.01 * 1000 = $ 10
Gold: $ 0.10 * 100 = $ 10
Euro: $ 0.0001* 125,000 = $ 12.50
4. Full cost
Full cost (or Contract Value) is the total price of the underlying asset of the contract.
FC =Quote * Contract Volume
(E.g.)
Crude Oil: $ 102.24 * 1,000 = $ 102.240
Gold: $ 1630.8 * 100 = $ 163.080
Euro: $ 1.3123 * 125.000 = $ 164,037.50
5. Margin Deposit
Margin Deposit (or the Initial Margin, initial margin, security, guarantee obligations) is the money locked in your account after the opening of the position. The value specified for one contract is determined by the exchange and varies quite rare.
MD = Constant value, constant
(Pledges are subject to change by the exchange itself, and their relevance should be specified on the corresponding website)
Crude Oil: $ 6,885
Gold: $ 10,125
Euro: $ 4,725
6. Leverage
Leverage is the ratio of money available to those used in the transaction, or the enlargement of equity. The value is individual for each futures.
LV = Total Cost: Marg. Pledge
Crude Oil: $ 102.240 $ 6,885, or 15 :1
Gold: $ 163.080 $ 10.125 or 16: 1
Euro: $ 164,037.5 $ 4,725 or 35: 1
7. Variation margin
Variation margin (or P & L, Profit / Loss) is money earned or lost as a result of the transaction. It is calculated at the completion of the transaction or at the end of the trading session.
Option 1. VM = (Quotation of output – Quotation of input) * Value of Contract
Option 2. VM = Number of Min. Ticks* Value of Min. Ticks
(In the examples both versions of calculation are used)
Oil: Buying a Contract for $ 102.24 and $ 103.12 for sale
($ 103.12 – $ 102.24) * 1000 = 88 * $ 10 = $ 880
Gold: Buying a Contract at $ 1630.8 and $ 1626.5 for sale
($ 1626.5 – $ 1630.8)*100 = -43 * $ 10 = – $ 430
Euro: Selling the contract at $ 1.3123 and $ 1.3095 for purchase
($ 1.3123 – $ 1.3095) * 125,000 = 28 * $ 12.50 = $ 350
How to calculate the “leverage” for futures?
Unlike Forex, there is no direct concept of “leverage” in the futures market.
Since all futures contracts have the fixed price of the item, as reflected in the specification and margin requirements defined by the exchange, leverage becomes a floating (or estimated) value.
Traders, who came to the futures markets from FOREX, often have questions how to calculate the leverage they are going to work with. It is quite easy to calculate leverage for futures.
Take, for example, the Swiss franc, if the size of the standard contract equals to 125K Swiss.
(e.g., yesterday) – 1.0970 (note that all quotes at the stock exchange are against the U.S. dollar, there is no “direct” and “reverse”).
Accordingly, in dollar terms, the minimum contract value on the Swiss franc will amount to 125000 * 1,0970 = 137125 U.S. dollars. Now check the established exchange margin requirements to trade in futures contracts on the Swiss franc.
In our case, for franc they equal to 7290 usd. That is, for purchase / sale of one contract there must be 7290 usd of margin security.
But here we are talking about the exchange initialization (initial) margin.
For comparison of leverages let’s take also intraday, reduced margin (for example, 1000 usd).
Thus, we have two margin requirements for opening of one standard contract: – 1000 usd during the day, and 7290 usd in case of SWAP.
Now divide the sum of our contract by the margin requirements and we will get two credit leverages:137125: 1000 = 137.125 – i.e the leverage will be 1:137 within the day.
137125: 7290 = 18,810 – i.e, the leverage will be 1:31 in case of SWAP.
However, these estimates are only a reference and have rather indirect connection to trade futures contracts.
Things are much simpler:
- The standard amount of the contract (lot) indicated in the contract specification.
- The standard tick price (of minimum price change), with indication of the specific currency in which the price of the asset is nominated.
- Margin requirements (how much money it is necessary to have on the account to become entitled to trade at least one contract).
