Example: Buying
It is two hours before the RBA meets to set the target cash rate, and you observe that the market is factoring in a 40% chance of a 25bp rate rise. From this information, you believe the RBA will raise rates.
Our price for a 25bp (0.25%) increase in the RBA cash rate is 38 - 42.
You decide to buy 5 contracts at 42, the ask price. Each contract is worth A$10 per point, therefore you are risking 42 x 5 contracts x A$10 per point = A$2,100.
Two hours pass, the RBA meets and decides to increase the rates by 0.25%. Therefore your binary trade is settled at a 100, leaving you with the below profit:
Profit
| Closing level | 100.0 |
| Opening level | 42.0 |
| Difference | 58.0 |
Profit = 58.0 x 5 contracts x A$10 = A$2,900
Example: Selling
It is three weeks before the next RBA cash rate announcement and the market is factoring in a 50% chance of a rate rise. You think they will not raise rates.
Our price for a 0.25% increase in the RBA cash rate is 48 – 52.
You decide to sell 2 contracts at 48, the bid price. Each contract is worth $10 per point. The worst outcome for you would be if they do decide to raise rates, and therefore your trade will settle at 100. In this case, you are risking (100 - 48) x 2contracts x A$10 per point = A$1040. Should they not raise rates, your binary will expire at zero, meaning that you will make a profit of 42 x 2 x A$10 per point = $840.
Two weeks later (one week before the RBA meeting), AU inflation figures are released and have come out lower than expected. Subsequently there is less speculation about a rate rise and our quote for a 0.25% increase in the RBA cash rate is now 22 – 26. You can decide to take your profit here by buying back at the ask price of 26, thereby making the below amount:
Profit
| Closing level | 48.0 |
| Opening level | 26.0 |
| Difference | 22.0 |
Profit = 22.0 x 2 contracts x A$10 = A$440