Futures and Options Mechanics
Futures lifecycle
An order is entered, matched and novated to the clearing house. The position is marked to market daily, with variation margin paid or received. The position can be closed by an offsetting trade or settled at expiry. NZX derivatives are generally cash-settled, so there is no physical delivery of the underlying. Contract specifications define the unit, tick size, expiry and settlement price.
Options mechanics
A call gives the right to buy the underlying at the strike; a put gives the right to sell. exercise results in assignment to a seller. Moneyness describes the strike relative to the underlying: in-the-money, at-the-money or out-of-the-money. The exam tests exercise decisions and the difference between intrinsic value and time value.
Orders and price quotation
Limit orders set a maximum buy price or minimum sell price; market orders prioritise execution; stop orders become market orders when a trigger is reached. Bank bill futures are quoted as 100 minus yield. A lower quotation means a higher yield. The tick value converts a price move into dollars.
Worked example
A trader sells 5 bank bill futures at 96.00 and buys them back at 95.80, using NZ$25 per 0.01 tick. The quotation fell 0.20, which is 20 ticks. The short position gains 20 × NZ$25 × 5 = NZ$2,500. The reasoning is that the seller benefits from a fall in the futures quotation, which corresponds to a rise in yield.
Traps
Reading a lower bank bill quotation as a lower price for the buyer; confusing stop and limit orders; forgetting that assignment affects the option seller; and ignoring expiry and settlement conventions.