In SDX Commodities & Energy you can choose to pay the premium in installments. This feature is currently supported for the following instruments:
Vanilla
Vanilla-based options, i.e., vanilla strategy, vanilla strip, vanilla strip strategy
Swaption
Asian
Asian-based option, i.e., Asian strategy, Asian strip, Asian strip strategy
Barriers
Binaries
European binary instruments
This feature is currently only supported in the Single Option page, and it can only be activated once you have calculated the instrument's results.
In order to calculate the premium in installments, SDX Commodities & Energy takes into account both the premium currency interest rate and the time factor.
It is important to note that even when you choose to pay the premium in installments, in net present value you are still paying the same premium. This can be seen in See "The Single Premium Amount is Displayed in the Results Area " and See "The Amount You Pay Per Installment Is Displayed in the Installments Window " below. In See "The Single Premium Amount is Displayed in the Results Area " in the Results area you see that the single premium that you would pay is 10.630M/10.736M. In See "The Amount You Pay Per Installment Is Displayed in the Installments Window ", the Installments Window shows how much you will pay for each installment, as well as its present value. If you add up the present value for each installment, the total is the same as the single premium that you would pay upfront.
Figure 1: The Single Premium Amount is Displayed in the Results Area
Figure 2: The Amount You Pay Per Installment Is Displayed in the Installments Window
After enabling the premium installments feature for a supported instrument, when you then save this instrument as a portfolio (Home tab > Save button) or add it to an existing portfolio (Home tab > Add to Portfolio button), it is saved with the correct cash flows. That is, besides the actual instrument you also see the cash flows that account for the transfer of the premium to the counterparty. For example, you price up a vanilla and enable the premium installments feature so you are paying the premium in two installments. When you then save it as a portfolio and open it in the Portfolio page, the instrument appears in the Portfolio page as follows:
The original vanilla
Two sell (i.e., “pay”) cash flows for the premium installments (together these add up to the overall premium)
A single buy (i.e., “receive”) cash flow (which is for the entire amount of the premium) and whose purpose is to balance the “pay” cash flows.
To activate the feature to pay the premium in installments:
| 1. | Enter one of the options for which this feature is supported. |
| 2. | Click Calculate. The Premium Installments button appears at the bottom of the Results area (as seen in See "The Premium Installments Button in the Results Area "). |
| Figure 3: | The Premium Installments Button in the Results Area |
| 3. | Click the Premium Installments button. |
| 4. | In the Installments Instrument window change the frequency, installment dates and weighting as necessary. |
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You can set the weight of each installment date from zero to infinity. |
| 5. | If you changed anything click Calculate to recalculate the spread of the premium. |
| 6. | Click Accept. An IN USE button appears next to the Premium Installments button to indicate that you are now paying the option's premium in installments (as seen in See "The IN USE Button Indicates that the Premium Installment Feature Is Activated "). |
| Figure 4: | The IN USE Button Indicates that the Premium Installment Feature Is Activated |
To deactivate the feature:
| 1. | In the Single Option page click the IN USE button. |
| 2. | Click Yes. The feature is deactivated. |