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TRADING ENERGY DERIVATIVES – MATH-GA_2800

Homework #2 – Construct Risk Premia Strategies

Due Feb’20 (before 5pm)

DESCRIPTION

The objective is to analyze the performance of carry and momentum strategies for oil futures:

· 100 WTI contracts for each of the two strategies

· Investment period: 01/01/2010-12/31/2022

· Trades are entered at the closing price on the day when the signal is calculated

· Roll  to  at the closing price on the 5^th business day prior to the futures expiration (the same as in Homework #1)

· Transaction costs: $0.01/bbl

ASSIGNMENT

Carry and momentum strategies are defined as follows:

 is either  or  contract, depending on the rolls, like in Homework 1.

1) Implement base carry and momentum strategies

- Implement base carry strategy  for  

- Implement base momentum strategy  for  (one month)  

- For each strategy construct and graph equity line  which is cumulative strategy P&L

(Start the line at zero;  is daily P&L from rolled futures like in Homework 1; include transaction costs):

The strategy can be implemented either in Excel or Python. If you choose to use Python, then provide detailed strategy output in Excel.

2) For each strategy, calculate the following performance metrics:

- Average Annual

- Annualized Sharpe Ratio :

- High water-mark:

- Drawdown is the distance from : 

(When  is graphed, it is shown with a negative sign as  to show it as loss) 

- Return on Drawdown:

3) Determine optimal parameters for each strategy

- For , find carry strategy  that maximizes Sharpe ratio

- For , find momentum strategy  that maximizes Sharpe Ratio

If optimal  and  are not unique, then you can use any of the optimal ones at your discretion  

4) Construct a mini-portfolio of two strategies

- Define portfolio as  

and find the strategy allocation  that maximizes Sharpe Ratio for the portfolio.

- Graph equity line  for the optimal portfolio .

5) Summarize results of 2)-4) in the Word document, and comment on strategy and portfolio performances.

Submit the strategy implementation file in 1) and summary of results 5) to NYU Brightspace.