Profit and Loss

Let's look now at how investors can make money with a futures contract. For this example, we'll use NYSE LIFFE's FTSE 100 Index Future.

Notice that the FTSE index future moves in increments of 0.5 points, unlike the index, which moves in 0.1 increments.

Although the future's tick size (the minimum price movement of a trading instrument) is officially 0.5 point it's easier just to think in terms of £10 per full point. So you can simply multiply any point price change by 10 to convert this to money terms.

Assuming an initial bid-offer spread (the difference between the bid and offer price) of 6532-6534, suppose you sold two September FTSE 100 Index Futures at the bid price of 6532. Three days later the price has fallen 124 points, giving a new bid-offer price of 6408-6410. You close out the position by buying two contracts at the new offer price of 6410 (122 points below the original bid price).

Profit is calculated by multiplying the change in price by the value per point then by the number of contracts, to give in this case a profit of £2440 (excluding any brokers commissions).

Here is a graphical representation of the profit/loss profile of a short sale of our FTSE 100 Index Future with a bid-offer price of 5532 - 5534. See how profit increases as the futures price falls, and losses mount as the futures price rises.

 

 

 

 

 

 

 

And here's the profit/loss profile for a long position (buy) in the same contract. Profit increases as the futures price rises, and losses mount as the futures price falls.