Contract value

Contract value is the money a futures position represents. The rule is simple — multiply the price or rate by the contract multiplier — but the multiplier is not the same in any two interest rate contracts, and that is where candidates lose marks.

It matters beyond arithmetic. The workbook says plainly that contract value is what determines the margin amount, transaction charges and regulatory charges. A trader who mis-states it mis-states his entire cost base, and a clearing member who mis-states it has under-collected margin.

Three live contracts, three formulas.

Cash settled GOI bond futures. The quotation is a clean price per Rs 100 of face value and the multiplier is the 2,000 units in a lot:

Contract value = Trade price × 2,000

91-day T-Bill futures. The quotation is 100 minus the discount yield, but the contract covers only 91 days — about a quarter of a year — so only a quarter of the yield is applied:

Contract value = 2,000 × (100 − 0.25 × y)

Overnight MIBOR futures. There is no price and no face value, only an interest amount on a notional principal of Rs 5 crore for a month. One basis point on that is Rs 5 crore × 0.01% × 30/365 = Rs 411, so a quoted rate of y per cent is worth 100 basis points times Rs 411 for each whole percentage point:

Contract value = Quoted rate × 100 × 411

The same logic decides what a tick is worth, and no two answers agree: Rs 5 on a bond futures lot, Rs 1.25 on a T-Bill futures lot, Rs 102.75 on a MIBOR contract — all from an identical Rs 0.0025 minimum move.

GOI bond futures    Contract value = Trade price × 2,000
                    Tick value     = 2,000 × 0.0025              = Rs   5.00

91-day T-Bill       Contract value = 2,000 × (100 − 0.25 × y)
                    Tick value     = 2,000 × 0.0025 × 0.25       = Rs   1.25

Overnight MIBOR     Contract value = Quoted rate × 100 × 411
                    Tick value     = 0.25 bp × Rs 411            = Rs 102.75
                    Rs 411         = Rs 5,00,00,000 × 0.01% × 30/365

Corporate bond index futures: contract value not less than Rs 2 lakh at introduction,
reviewed half-yearly by the exchanges.

All three, from the workbook.

A participant buys 5 lots of single bond futures at Rs 101:

Contract value = 5 × 2,000 × 101 = Rs 10,10,000

A participant buys 10 lots of 91-day T-Bill futures at Rs 95, a discount yield of 5%:

Contract value = 2,000 × (100 − 0.25 × 5) × 10
               = 2,000 × 98.75 × 10
               = Rs 19,75,000

Note that the price is Rs 95 but the contract value per lot is Rs 1,97,500, not Rs 1,90,000 — the 0.25 factor is worth Rs 7,500 a lot and is the single most common error on this contract.

A participant buys 10 lots of Overnight MIBOR futures at 4.50%:

Contract value = 4.50 × 100 × 411 × 10 = Rs 18,49,500

Why it is not just bookkeeping. Take the bond futures position above and put charges on it. SEBI turnover fees, exchange transaction charges, stamp duty and GST are all levied on turnover, which is contract value:

5 lots at Rs 101  → turnover Rs 10,10,000
Same 5 lots at Rs 99 → turnover Rs 9,90,000

A two-rupee move in price changes the charged turnover by Rs 20,000. Scale that to a desk running 2,000 lots a day at Rs 101 — a turnover of Rs 40.4 crore — and a one-paisa error in the price used propagates into every fee line and every margin call.

And a size comparison. One MIBOR contract carries a notional principal of Rs 5 crore, but its contract value at 4.50% is only Rs 18.5 lakh, because the contract is on a month's interest, not on the principal. One bond futures lot has a face value of Rs 2 lakh and a contract value near Rs 2 lakh. Comparing the two on contract value alone compares nothing.

Chapter 3, section 3.1.1 (Futures Terminologies), defines contract value as price or rate multiplied by the contract multiplier, lot size or contract size. Section 3.4 then works it contract by contract — 3.4.1 for cash settled GOI bond futures, 3.4.2 for 91-day T-Bill futures, 3.4.3 for Overnight MIBOR futures — with the tick-value arithmetic for each, and states that contract value is important for determining margin amount, transaction charges and regulatory charges. Chapter 4, section 4.9, gives Trade Price × 2,000 for interest rate options.

Questions are computational and use the workbook's own figures: given lots and a price or rate, compute the contract value; given a tick size, compute the change in contract value per tick.

• Do not drop the 0.25 on T-Bill futures. 2,000 × (100 − y) is not the contract value; the 91-day tenor is a quarter of a year and the formula carries it.
• MIBOR futures use the rate, not a price. Quoted rate × 100 × 411 — there is no Rs 100 face value anywhere in it.
• Multiply by the number of lots. The formulas give value per lot; the workbook's examples all scale up and a single-lot answer is incomplete.
• Contract value is not face value. Rs 2 lakh of face value has a contract value of price × 2,000, above or below Rs 2 lakh as the price is above or below 100.
• Each contract has its own tick value. Rs 5, Rs 1.25 and Rs 102.75 from the same Rs 0.0025 tick — check which contract the question is on before answering.
• Contract value drives the charges. Margin, brokerage, SEBI turnover fee and stamp duty are all computed off it, so an error here is an error everywhere downstream.