Chapter 6
Common Attributes of Financial Instruments
6.1 SUMMARY OF ALL TRADE TERMINOLOGY USED IN CHAPTERS 1 TO 5
Table 6.1 reiterates all the terms that we have learned about trades in the various instrument classes in the previous chapters and also categorises each term and shows to which instruments the term applies.
Table 6.1 Trade terminology summary
6.2 SUMMARY OF BASIC TRADE ARITHMETIC FOR TRANSACTIONS IN SECURITIES, FUTURES AND OPTIONS
6.2.1 Calculating the principal value of a trade
In Chapter 2 we learned that equity prices may be quoted in whole currency units or in “penny units” of the currency, while in Chapter 3 we learned that bond prices are usually expressed as percentages of the principal amount being traded. In Chapter 5 we learned that when dealing with futures and options we have to take into account the quantity of the underlying instrument when calculating the value of a trade in these instruments.
With this knowledge, we can build a generic formula to calculate the principal value of any security, future or option. The formula is:
Here are some examples:
