Options on JGB Futures

Examples

Update : Jun. 06, 2011

(Note) Brokerage commissions and other expenses have not been taken into account.

(1) When options are settled through offsetting transactions

1. An investor purchases one unit of call options on 10-year JGB Futures (a strike price of 139JPY) at 0.30JPY, and pays 0.30JPY * 100 millionJPY / 100JPY = 300,000JPY for the trade.
2. The price of these call options later rises to 0.90JPY, so the investor sells them.
3. The investor receives 0.90JPY * 100 millionJPY / 100JPY = 900,000JPY as sales proceeds, generating profits of 600,000JPY.

(2) When options are settled without offsetting transactions

a. Example of Call Options on 10-year JGB Futures

	An investor purchased one unit of call options on 10- year JGB Futures (a strike price of 139JPY) at 0.70JPY	(a) When the buyer exercises his/her/its option when the futures price is 140JPY	(b) When the buyer exercises his/her/its option when the futures price is 139.40JPY	(c) When the futures price reaches 138JPY
Buyer of options	The buyer paid 0.70JPY * 100JPY millionJPY / 100JPY = 700,000JPY as purchase consideration. (The buyer acquires the right to purchase one unit of the futures contract at 139JPY.)	The purchase of the futures contract at 139JPY is effected. (Since the futures contract priced at 140JPY can be acquired at 139JPY, the buyer can earn the difference of 1JPY * 100 million JPY / 100JPY = 1 million JPY. By deducting a purchase consideration of 700,000JPY from the amount mentioned above, the buyer earns a profit of 300,000JPY at this stage.)	The purchase of the futures contract at 139JPY is effected. (With gains of 400,000JPY partially offsetting purchase consideration of 700,000JPY, the buyer incurs a loss of 300,000JPY at this stage.)	By abandoning the options, the loss is limited to 700,000JPY.
Seller of options	The seller receives 700,000JPY as sales proceeds. *Deposit　Trading Margin	The sale of the futures contract at 139JPY is effected. (The seller incurs a loss of 300,000JPY incurs at this stage.)	The sale of the futures contract at 139JPY is effected. (The seller earns a profit of 300,000JPY at this stage.)	Premiums of 700,000JPY received become profits as the buyer of the options abandons his/her/its options.

b. Example of Put Options on 10-year JGB Futures

b. Example of Put Options on 10-year JGB Futures

	An investor purchases one unit of put options on 10-year JGB Futures (a strike price of 139JPY) at 0.70JPY	(a) When the futures price reaches 140JPY	(b) When the buyer exercises his/her/its options when the futures price is 138.90JPY	(c) When the buyer exercises his/her/its options when the futures price is 138JPY
Buyer of options	The buyer pays 0.70JPY * 100 million JPY/ 100JPY = 700,000JPY as purchase consideration. (The buyer acquires the right to sell one unit of the futures contract at 139JPY.)	By abandoning the options right, the loss is limited to 700,000JPY.	The sale of the futures contract at 139JPY is effected. (With gains of 100,000JPY partially offsetting purchase consideration of 700,000JPY, the buyer incurs a loss of 600,000JPY at this stage.)	The sale of the futures contract at 139JPY is effected. (Since the futures contract priced at 138JPY can be acquired at 139JPY, the buyer can earn the difference of 1JPY * 100 million JPY / 100JPY = 1 million JPY. Deducting purchase consideration of 700,000JPY from the amount above, the buyer earns a profit of 300,000JPY at this stage.)
Seller of options	The seller receives 700,000JPY as sales proceeds. *Deposit trading margin	Premiums of 700,000JPY received become profits as the buyer of the options abandons his/her options.	The purchase of the futures contract at 139JPY is established. (The seller earns a profit of 600,000JPY at this stage.)	The purchase of the futures contract at 139JPY is established. (The seller incurs a loss of 300,000JPY at this stage.)