BAFI1029 Derivatives and Risk Management Assessment 2 – Task 1 – Individual Trading Session #1
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BAFI1029 Derivatives and Risk Management
Assessment 2 – Task 1 – Individual Trading Session #1
Report and Excel
Due Date: Week 10, 23:59 Friday, 15 September 2023 (Singapore time)
Ø Assessment Task
This is an individual task. In this assessment, students are required to use the Trading Simulator tool from CME Group to trade on future products to hedge risk and/or take advantage of speculation. In the #1 trading session, you will focus on Energy Future products.
The goal of this individual assignment is to gain a better understanding of the future market and risk management process, by testing and refining your trading strategies.
Below are the steps you need to follow to accomplish the task:
● Attend your local class in Week 5. Use your email address to create an account with CME Group, during the workshop.
● Your instructor will use 1.5-2 hours to go through the task, elaborate the basic specs of Energy future products, explain the trading rules and demonstrate how to trade. You can start trading after instructor’s demonstration.
● Your trading is to primarily hedge your risk exposure to the oil price. For student whose student number end with odd number, assume you are treasurers at airline company, and you are going to buy 10,000 barrels of jet fuel oil in 3 months. For student whose student number end with even number, assume you are jet fuel oil producer, and you are going to sell 10,000 barrels of jet fuel oil in 3 months. You aim to use Energy future products to hedge your price risk. Record the fuel price when they start to take positions on CME, to: 1) provide a background info about/justify how many contracts you go long/short, 2) show whether you succeed in hedging risk.
● You have $100,000 USD cash on hand at the beginning of your trading. You must use at minimum 70% of your account balance to hedge your oil price risk. Meanwhile, you are allowed to have up to 30% of your account balance to speculating/arbitraging, and the speculation/arbitrage products are not limited to Energy futures (e.g., other future products, you can even use Crypto futures to earn short-term profit, but also mind the potential loss).
● You can trade any time after your instructor’s demonstration, till any date before 15 September 2023. You can also stop your trading before this date if you already finalized your trading strategy. You can trade as many times as you want, as long as you can justify your trading philosophy. You can do some trials at the beginning of the trading period to get familiar with the platform. When you decide to officially start to implement your strategy, please do not reset the game before your last trading date.
Note: Please remind to leave some time to consolidate your trading record and report. For example, someone wants to stop trading on 10 September 2023 and prepare the excel and report between 11-15 September, some others want to trade till 14 September 2023 and prepare the report and excel in several hours or one day. Both are good, as long as you are confident about the quality of your submission.
· You can take both long and short positions in the future contracts. Your orders might be rejected by the system because of margin shortage or market close. When your account balance drops to near zero, you are basically out of the game.
● Please use the excel template to record your trading and balance on a daily basis, or whenever you make a trade. It is not necessary to flatten (close out) all your open positions. It is a good practice to keep a record on your daily account balance, profit and loss as well as open positions, to facilitate consolidating your report. Please do note that the template is just a basic version provided by the teaching team, you will need to modify it to satisfy your needs.
● Based on your trading history, profit/loss from your future account, and the income/cost from your physical asset, you need to form a report to summarize your trading exercise.
Note: Since the contracts can’t be bought in fraction, a tiny variation from the specified budget is acceptable. You can choose to hold some Cash if you believe the investment opportunity is not good enough, but also need to justify this decision in your report.
Ø CME Institute Trading Simulator
Trading Simulator replicates live futures markets by leveraging real market data. A constant stream of new prices informs your strategies for CME Group’s top products across all 6 asset classes, including Bitcoin and Micro E-mini futures. The Access to the simulator is free, all you need is a CME Group Login account, which can be created using your own email. Please create an account during the workshop.
Ø Marking guide - Your report must include the following sections:
1. Trading objectives
Give an overview of your trading objectives.
2. Summarize your hedging strategy Provide a summary on how you use Energy future products to hedge your commodity price risk. The content should include but not limited to:
· Do you think it is necessary to hedge your jet fuel price risk, and what percentage of your exposure you think you should hedge (e.g., ?% out of the 10,000 barrels)
· Which future product(s) you use to hedge your risk, outline their basic specs?
· What strategy you employed to hedge (e.g., delivery month, contract price, contract amount, long or short, etc)?
· What is the performance of your hedging by the end of your last trading date? And how the spot price change for jet fuel oil?
· Are there any differences between jet fuel oil and the underlying assets of your selected hedging product? And what risk can be generated from these differences?
3. Summarize your speculation trading
Provide a summary on how you use future contracts to speculate/arbitrage during your trading period. The content should include but not limited to:
· Why you take/not take speculation position?
· How the speculation performed and explain your profit/loss?
Total=15 marks
Please prepare the report and submit it together with the report of Assessment 2 Task 2.
You also need to prepare the spreadsheet to record your trading activities, and submit it together with the spreadsheet of Assessment 2 Task 2.
Ø Submission
All submissions must be made electronically on Canvas, accompanied by a cover sheet. The submission must be using 1 or 1.5 spacing and 12-point Times New Roman font. Work that fails to meet these specifications will not be accepted. Students should ensure that the report is free from problems like copying and plagiarism.
The report and excel spreadsheet will be submitted through “Canvas-Assignments-Assessment 2: Report and spreadsheet submission”. You can submit multiple times before the due date. The report should be no longer than 1000 words (-/+ 15%), excluding references and appendix. The student can have up to 2-page appendix. Citation and reference should be provided where necessary. The Excel file contains your workings to support the reported analysis.
Students are required to keep back-ups of all submitted work just in case any are lost.
The instructor of your enrolled trading session will mark your assessment.
Note:
● This instruction includes suggestions on items to include in the report, more information for parts you think are important may be included as you feel necessary, keeping in mind the word limit.
● The teaching team is not supposed to comment on your calculation workings or identify where your calculation mistakes. The teaching team will provide guidance to make sure that you are on the right track. However, it is still your responsibility to investigate your work and identify the errors.
Ø Additional Resources:
2. Jet Fuel Price Monitor
https://www.iata.org/en/publications/economics/fuel-monitor/
3. Oil Price
https://oilprice.com/oil-price-charts/#WTI-Crude
4. A proxy for risk-free rate such as 3-month treasury bill can be found here: https://fred.stlouisfed.org/series/TB3MS
5. S&P 500 index historical performance
https://au.finance.yahoo.com/quote/%5EGSPC/history?p=%5EGSPC
6. If you need more resources, try Google first
Ø Extension and Special Consideration Policy
Unless extension is granted, severe penalties apply for late submission. For late submission, the mark awarded will be reduced by 10% for each day the submission is late. Submissions that are late by 7 days or more will not be marked and zero marks will be awarded.
If you can't submit an assessment on time due to circumstances outside your control, you may be eligible for an extension to the due date. See https://www.rmit.edu.au/students/my-course/assessment-results/special-consideration-extensions/extensions. Links to an external site.If you seek an extension to the prescribed due dates, up to 7 days, you must submit your request through the Assessment Extension Tool enabled in Canvas, and where appropriate supporting documents such as a medical certificate in case of illness should be provided. It will be reviewed and actioned directly in Canvas. You must submit the request at least one working day before the assessment deadline for an extension to the due date of up to seven calendar days.
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Marking Rubric (15 marks) |
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80%-100% |
60%-80% |
40%-60% |
20%-40% |
0%-20% |
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Trading objective (2 marks)
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Trading objectives are clearly identified and summarized without errors.
Issue/problem to be considered critically is stated clearly and described comprehensively, delivering all relevant information necessary for full understanding
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Majority of the trading objectives are clearly identified and summarized without errors.
Issue/problem to be considered critically is stated clearly and described, delivering some relevant information necessary for full understanding
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Part of the trading objectives are clearly identified and summarized with some errors.
Issue/problem to be considered critically is stated clearly and described, delivering some relevant information necessary for full understanding
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Trading objectives are not clearly identified and summarized with some errors.
Issue/problem to be considered critically is stated and described, delivering some relevant information necessary for full understanding
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Do not provide discussion on trading objectives |
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Trading strategy (3 marks) (#AoL3a Adaptive)
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Implements solution(s) in a manner that addresses thoroughly and deeply multiple contextual factors of the problem. Transactions are clearly and well planned to achieve the objectives, well considering the complexities of the economy. Well-justified assumptions are provided.
Explain what products were sold or bought, demonstrating the excellent understanding of how future works
Clearly identify the differences between hedging and speculating and provide convincing evidence |
Implements solution(s) in a manner that addresses multiple contextual factors of the research question, hypothesis and/or problem in a surface manner. Transactions are clearly planned to achieve the objectives, considering the complexities of the economy. Justified assumptions are provided
Explain what products were sold or bought, demonstrating the good understanding of how future works
Clearly identify the differences between hedging and speculating and provide convincing evidence |
Implements solution(s) in a manner that addresses the research question, hypothesis and/or problem but ignores relevant contextual factors. Transactions are planned to achieve the objectives, some consideration on the complexities of the economy. Assumptions are provided but not well supported
Explain what products were sold or bought, demonstrating an understanding of how future works
Clearly identify the differences between hedging and speculating and provide some evidence |
Implements solution(s) in a manner that does not directly address the research question, hypothesis and/or problem. Transactions are planned to achieve the objectives, no consideration on the complexities of the economy. Limited assumptions are provided and not well supported
Explain what products were sold or bought, but lack of understanding of how future works
Clearly identify the differences between hedging and speculating but do not provide convincing evidence |
Implements the solution incorrectly or in a manner that would cause more problems. Transactions are not planned to achieve the objectives, no consideration on the complexities of the economy. No assumptions are provided and not supported
Do not explain what products were sold or bought, lack of understanding of how future works
Do not identify the differences between hedging and speculating and do not provide convincing evidence |
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All transactions/deals are clearly recorded, reported and explained (4 marks) (#AoL4A Digitally Adept)
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Demonstrate proficiency in using the trading platform, understand how margin works. Demonstrates a sophisticated ability to independently choose, use and troubleshoot current technologies and is able to transfer their knowledge to explore and learn emerging technologies.
Transaction and position records are well and clearly presented in excel without errors
All transactions are clearly explained |
Demonstrate ability in using the trading platform, understand how margin works. Demonstrates a basic ability to choose, use and troubleshoot current technologies and is usually able to transfer their knowledge to explore emerging and learn technologies.
Transaction and position records are clearly presented in excel without errors
Majority of transactions are clearly explained |
Demonstrate ability in using the trading platform, understand how margin works. Demonstrates a basic ability to choose, use and troubleshoot current technologies and is sometimes able to transfer their knowledge to explore emerging technologies. Sometimes needs guidance.
Transaction and position records are presented in excel but hard to understand or with errors
Part of transactions are clearly explained |
Demonstrate ability in using the trading platform, show limited understanding on how margin works. Demonstrates a basic ability to choose, use and troubleshoot current technologies and is sometimes able to transfer their knowledge to explore emerging technologies. Often needs guidance.
Not all of the transaction and position records are presented in excel but hard to understand or with errors
Majority of transactions are not clearly explained |
Do not show ability in using the trading platform, no understanding on how margin works. Does not demonstrate an ability to move beyond the use of current technologies or transfer their knowledge to emerging technology.
Transaction and position records are not presented in excel or full of errors
Transactions are not clearly explained or not matched with the report |
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Performance is clearly analyzed (5 marks)
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Profit and loss are excellently clearly reported and concluded for both hedging and speculating
Excellent analysis is provided to explain the performance, linking to the real-word markets
Key learnings are reflected and go beyond the knowledge from class |
Profit and loss are clearly reported and concluded for both hedging and speculating
Good analysis is provided to explain the performance, linking to the real-word markets
Key learnings are reflected |
Majority of the profit and loss are clearly reported and concluded for both hedging and speculating
Enough analysis is provided to explain the performance, but limited link to the real-word markets
Key learnings are reflected |
Profit and loss are reported and concluded, but with errors.
Insufficient analysis is provided to explain the performance, failing to link to the real-word markets
Key learnings are not fully reflected |
Profit and loss are not reported and concluded, with errors.
Limited analysis is provided to explain the performance, failing to link to the real-word markets
Key learnings are not fully reflected |
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Format and Information source (1 mark)
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The report is well organized and clearly written. The underlying logic is clearly articulated and easy to follow. Words are chosen that precisely express the intended meaning and support reader comprehension. Diagrams or analyses enhance and clarify the presentation of ideas. Sentences are grammatical and free from spelling errors. The report follows designated guidelines. |
The report is organized and clearly written for the most part. In some areas, the logic or flow of ideas is difficult to follow. Words are well chosen with some minor exceptions. Diagrams are consistent with the text. Sentences are mostly grammatical, and only a few spelling errors are present, but they do not hinder the reader. The report follows designated guidelines. |
Meaning is generally made clear through mostly correct and appropriate formal academic style, grammar, vocabulary, punctuation and spelling.
Paragraphs generally have topic sentences and are adequately developed, coherent and logical |
Meaning is generally made clear through adequate and appropriate formal academic style, grammar, vocabulary, punctuation and spelling; some lapses causing lack of clarity.
Some but not all paragraphs have topic sentences and are adequately developed, coherent and logical |
Meaning is impeded through frequent use of informal language and errors in grammar, vocabulary, punctuation and spelling.
Paragraphs lack topic sentences and are inadequately developed with poor coherence of ideas and irrelevant information |
2023-09-12