Summary
People talk about a market being up or down so many points all of the time, but few people understand how that relates to their account equity going up and down. The key factors in understanding position valuation are Contract Size, Trading Units, Fractional Point Value. These factors are detailed in UA’s Market Specifications for easy reference. This document explains their relationship and how they are used.
Since futures trade in contracts rather than shares, there is a basic question as to how much of the deliverable one has bought or sold. This is called the Contract Size. For markets such as Corn, the answer is 5000 bushels. For the Universal Stock Future for BNC, the contract size is 1000 shares. For the US Treasury Note, the contract size is $200,000 worth of notes earning 6% interest. Since the actual deliverables for Corn and Treasury Notes rarely ever correspond with the exact moisture and time frame, respectively, the actual settlement process may involve paying more or less than the position’s accounting value, but this document only concerns the accounting value of trading positions.
Another
relevant field in the contract specification is the Trading Units. This tells us how to interpret the price
quotation. For example, Corn trades in
cents per bushel. For the stock future
for BNC, the trading units are in GBP per Share. For the US Treasure Note, the trading unit is
in points.
The whole point value is the profit that a long position would have if the price were to increase by one full point for a one contract trade.
For Corn, the whole point value is easy to determine. If the price goes for 241 4/8 to 242 4/8 and one has a long position of one contract, then the profit is 1 cent/bushel * 5000 bushels/contract * 0.01 cents/USD * 1 contract = $50.
For the stock future for BNC, the whole point value is also easy to determine. If the price goes from 651.50 to 652.50 and one has a long position of one contract, then the profit is 1 GBP/share * 1000 shares/contract * 1 contract = 1000 GBP.
For the Note, if the price goes from 102 19.75/32 to 103 19.75/32, the profit is 1% * 200,000 USD/contract * 1 contract = $2000.
Many people prefer to work with the Fractional Point Value. This is profit or loss for a small point change. A small point is the smallest unit of change in the quoted number. This depends, unfortunately, upon the details of the quote vendor’s presentation of the price. For Corn, the small point is 1/8th even that it trades in 2/8th. For the stock future for BNC, the small point is 1/100th even that it trades in 50/100th. For the Note, the small point is 0.1/32 = 1/320. The point values are thus $50/8 = $6.25, 10 GBP, and $6.25, respectively.
Unfortunately, there are some markets such as the Australian Government Bonds which quote relative to the yield of the bond. As a result, there is a non-linear relationship between the quoted price and the value of the position. The “Point Value” depends upon the price as have been approximated in the UA Market Specifications.