How to Calculate Performance on Derivatives
- 1). Determine the market price of the underlying security. If you have an equity derivative (call) then you have the option to buy a stock at a certain price in the future. Let's say the current price of the stock is $5.
- 2). Determine the predetermined price in the future. This is also known as the "strike" price. Let's say the strike price of the derivative is $8.
- 3). Determine the price you paid for the option. Let's say you originally paid $1 for the option to purchase the stock for $5 if it goes to $8 in the future.
- 4). Determine the difference between the strike price and the current price of the underlying stock. The answer for our equation is $8 (strike price) - $5 (current value of the stock) equals $3. This is the "intrinsic value" of the option.
- 5). Divide the difference between the price paid and the intrinsic value by the price paid. The answer is: $2 ($3 - $1) /$1 = .5 or 50 percent (.5 x 100). This is the current performance return on the derivative.
Source...