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:

• IBM shares are quoted in whole units of USD.
• HSBC shares are quoted in penny units of GBP.
• National Grid bonds are quoted in percentages of face value.
• Euro Bund Futures have to take into account the fact that one lot of this contract is equivalent to a bond quantity of 100 000.

Therefore, if the price of all four of these instruments is quoted as “97”, and the quantity of a trade is 10000, the calculation is as shown in Table 6.2.

Table 6.2 The interpretation of a price

6.2.2 Calculating the consideration

The consideration of a trade (i.e. the total amount payable by the buyer) is

Chapter 3 told us how accrued interest is calculated on debt instruments.

Also, refer to Chapter 10 for more information on the static data that needs to be held to perform trade proceeds calculations accurately. Commissions and fees calculations and static data are covered in section 10.7.