Chapter 4: Pricing

Key Concepts

• Contract Sizes: While there are many contract sizes, only a few need to be memorized:

  • Grains (corn, wheat, soybeans): 5,000 bushels per contract.

• Financial Futures: Divided into long-term and short-term contracts, each quoted differently.

Long-term Contracts

1. Treasury Bonds and Notes

   • Quoted in points and 32nds of a point.
   • Example: 98-116 is 98 and 16/32 of a percent of its par value.
   • Par value is $100,000.
   • Full point move equals $1,000; each 32nd is worth $31.25.

2. Calculations

   • Memorize: Full point = $1,000; each 32nd = $31.25.
   • For example, a move from 98-16 to 99-16 would be a $1,000 change.

Short-term Contracts

1. T-Bill and Eurodollar Contracts

   • Quoted in points and basis points.
   • Contract size is $1 million, 3-month or 13-week instrument.
   • Each basis point = 0.01% = $25.

2. Calculations

   • A move of 14 basis points = 14 * $25 = $350.*

Important Market Concepts

• Inverse Relationship: Interest rates and bond prices move inversely.

  • Interest rates up, bond prices down and vice versa.

• Foreign Currency Futures:

  • Prices are inverse to the US dollar.
  • E.g., If the euro goes up, you go long euro futures.

• Gold and US Dollar Relationship: Gold prices also move inversely with the US dollar.

Price Limits

• Daily Price Limits: Established by exchange to prevent extreme volatility.
  • Trading can continue within limits, but not beyond.
  • Nearest expiration month usually has no price limits.

Problem Solving

• Example Question: If futures trade at the daily limit, can trading continue?
  • Best answer: Trading can continue within limits.

Conclusion

• Take a custom exam on this chapter to reinforce learning.
• Next up: Orders.