Tick value

Tick size tells you how far the price may move. Tick value tells you what that move is worth to you.

They are different because a contract almost never covers exactly one quotation unit. Gold is quoted in rupees per 10 grams but a regular contract covers a kilogram — a hundred times as much — so every rupee of price movement is a hundred rupees of position.

The bridge between the two is the quotation factor: how many of the physical market's quoted units make up the lot.

Three numbers, taken straight off the contract specification:

• Lot size — how much commodity one contract covers
• Quotation factor — the number of physical units the price is quoted against
• Tick size — the minimum price movement

Divide the lot by the quotation factor to get how many quoted units the contract represents, then multiply by the tick size.

The practical use is position sizing. A trader who can tolerate a Rs 5,000 loss on a single position and who knows one tick is worth Rs 100 knows his stop is fifty ticks wide. It is also the unit in which mark-to-market moves: the daily MTM on a position is the number of ticks the settlement price moved, multiplied by the tick value, multiplied by the number of lots.

Tick Value = (Lot size / Quotation factor) x Tick size

Lot size and quotation factor must be in the same physical unit — grams with grams, kilograms with kilograms — before they are divided.

Both of the workbook's worked cases, then the consequence.

Gold, regular contract

Quotation factor = Rs per 10 grams
Lot size         = 1 kg = 1,000 grams
Tick size        = Re 1 per 10 grams

Tick value = (1,000 / 10) x 1 = Rs 100

Zinc

Quotation factor = Rs per kilogram  (so the factor is 1)
Lot size         = 5 MT = 5,000 kilograms
Tick size        = Rs 0.05

Tick value = (5,000 / 1) x 0.05 = Rs 250

Now put it to work. A trader is long three gold contracts and the settlement price falls from Rs 50,000 to Rs 49,850 per 10 grams — 150 ticks.

MTM loss = 150 ticks x Rs 100 x 3 lots = Rs 45,000

That Rs 45,000 is debited overnight, and the same arithmetic scales the workbook's own gold example: a Rs 100 per 10 grams move on a one-kilogram contract is a notional Rs 10,000 on the position.

Chapter 3 (Commodity Futures), section 3.9, where the formula and both worked examples appear. This is one of the most reliably calculated items in the paper — the question hands you a lot size, a quotation and a tick and asks for the tick value, or runs it backwards and asks for the tick size implied by a given tick value.

• Match the units before dividing. A lot of 1 kg against a quotation per 10 grams is 1,000 / 10 = 100, not 1 / 10.
• The quotation factor is 1 when the price is quoted per unit of the lot measure — zinc is quoted per kilogram and the lot is in kilograms, so the divisor is 1, not 5,000.
• Tick value is not the contract value. It is what one minimum move is worth, not what the contract is worth.
• A bigger tick value does not mean a riskier contract. Gold's Rs 100 tick against zinc's Rs 250 says nothing about which position carries more risk — for that you need contract value and volatility.
• Tick value changes whenever the lot size changes, even if the tick size does not. Index contracts whose lot is reset on annual rebalancing are the workbook's example.