Question

Consider the Part exchange. Each Part contract has a market value of $20 and a notional value of $100. Over one day, the following trades occur:

*A long, B short 5 contracts

*B long, C short 5 contracts

What is the notional value of open interest?

A.) $100

B.) $0

C.) $500

D.) $1,000

Answer 1

Open interest is calculated by adding all the contracts from opened trades and subtracting the contracts when a trade is closed.

In this case,

- A goes long for 5 comtracts and B goes short for 5 contracts - Hence total open interest is  5+5 =10

- Now B goes long for 5 contracts squaring off his above position and C goes short for 5 contract - So now the total interest is the transactions which are not yet squared-off :

i.e.A - Long - 5 contracts

B - 0 contracts

C - Short - 5 contracts.

Therefore total Open interest = (5+5) = 10 contracts

Notional value of a contract = $ 100 per contract.

Therefore the total notional value of open interest = Toal open interest * Notional value per contract

= 10 contracts * $100

= $1000