Bites Of Trading Knowledge For New TOP Traders #10 (short read)
Bites Of Trading Knowledge For New TOP Traders #10
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What is the Notional Value of a Futures Contract? -
Notional value of a futures contract is how much total value the contract theoretically controls.
Contract Size * Underlying Price = Notional Value Mini US Dollar Index® Futures (SDX) for example has a contract size of $200 x Index value and assuming the SDX price is 98.000, the notional value of the futures contract is $19,600.00.
What is the difference between Margin and Leverage? -
Margin is the amount of money deposited with the broker to control a futures contract. It is determined by the futures exchange and maybe adjusted by the broker to manage risk to their clients.
Leverage is the ability to use less money to theoretically control 1 futures contract compared with buying the product underlying the contract outright which amounts to the notional value of the futures contract.
To calculate how much leverage a futures contract gives, divide the notional value of the contract by the margin. The SDX example above had a notional value of $19,600.00 and with a margin requirement of $380, is equal to approximately 51 times leverage on our money ($19,600.00 / $380 = 51).
What is a Point and a Tick? -
Point is the smallest price increment that can occur on the left side of the decimal point. (Example. 90.000)
Tick is the price movement that occurs on the right side of the decimal when looking at the price of a futures contract and is the smallest possible price change measured by markets. A Point is composed of Ticks. (Example. 90.000) Mini US Dollar Index® Futures (SDX) has a minimum price fluctuation of $0.005 representing one tick and would move from 90.000 to 90.005. It takes 200 ticks to make one point or a move from 90.000 to 91.000.
RISKS AND OPPORTUNITIES FOR CORPORATES AND INDIVIDUAL INVESTORS -
Common application of financial market instruments for managing risk and opportunities.
Hedging Portfolio Risk
Hedging spot Australian Dollar (AUD) exposure with the Mini US Dollar Index® Futures (SDX) contract is a way to manage portfolio risk by taking a directional position opposite to the underlying asset as protection. For example, a hedger may have plans to hedge downward price movement in AUD using futures contracts based on in-house market and portfolio analytical processes. The market analysis may use common technical analytical techniques such as support and resistance to formulate the trade decision. In the chart (Figure 1), if AUD is expected to weaken as it nears the resistance areas, the hedger may plan to enter into a long futures position using the Mini US Dollar Index® Futures (SDX) contract at or under the price levels of $0.7560 or $0.7460 to lock in the value of their underlying AUD position.
TRADDICTIV · Research Team
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Disclaimer:
We do not provide investment advice, nor provide any personalized investment recommendations and/or advice in making a decision to trade. Before you start trading, please make sure you have considered your entire financial situation, including financial commitments and you understand that trading is highly speculative and that you could sustain significant losses.
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What is the Notional Value of a Futures Contract? -
Notional value of a futures contract is how much total value the contract theoretically controls.
Contract Size * Underlying Price = Notional Value Mini US Dollar Index® Futures (SDX) for example has a contract size of $200 x Index value and assuming the SDX price is 98.000, the notional value of the futures contract is $19,600.00.
What is the difference between Margin and Leverage? -
Margin is the amount of money deposited with the broker to control a futures contract. It is determined by the futures exchange and maybe adjusted by the broker to manage risk to their clients.
Leverage is the ability to use less money to theoretically control 1 futures contract compared with buying the product underlying the contract outright which amounts to the notional value of the futures contract.
To calculate how much leverage a futures contract gives, divide the notional value of the contract by the margin. The SDX example above had a notional value of $19,600.00 and with a margin requirement of $380, is equal to approximately 51 times leverage on our money ($19,600.00 / $380 = 51).
What is a Point and a Tick? -
Point is the smallest price increment that can occur on the left side of the decimal point. (Example. 90.000)
Tick is the price movement that occurs on the right side of the decimal when looking at the price of a futures contract and is the smallest possible price change measured by markets. A Point is composed of Ticks. (Example. 90.000) Mini US Dollar Index® Futures (SDX) has a minimum price fluctuation of $0.005 representing one tick and would move from 90.000 to 90.005. It takes 200 ticks to make one point or a move from 90.000 to 91.000.
RISKS AND OPPORTUNITIES FOR CORPORATES AND INDIVIDUAL INVESTORS -
Common application of financial market instruments for managing risk and opportunities.
Hedging Portfolio Risk
Hedging spot Australian Dollar (AUD) exposure with the Mini US Dollar Index® Futures (SDX) contract is a way to manage portfolio risk by taking a directional position opposite to the underlying asset as protection. For example, a hedger may have plans to hedge downward price movement in AUD using futures contracts based on in-house market and portfolio analytical processes. The market analysis may use common technical analytical techniques such as support and resistance to formulate the trade decision. In the chart (Figure 1), if AUD is expected to weaken as it nears the resistance areas, the hedger may plan to enter into a long futures position using the Mini US Dollar Index® Futures (SDX) contract at or under the price levels of $0.7560 or $0.7460 to lock in the value of their underlying AUD position.
TRADDICTIV · Research Team
--------
Disclaimer:
We do not provide investment advice, nor provide any personalized investment recommendations and/or advice in making a decision to trade. Before you start trading, please make sure you have considered your entire financial situation, including financial commitments and you understand that trading is highly speculative and that you could sustain significant losses.
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