BAFI1026 Derivatives and Risk Management

Assessment 2 – Task 1 – Individual Trading Session #1 (15%)

Report and Excel

2022

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:

● In weeks 3, enroll in the trading session from your timetable system. There are 7 available slots you can choose, as follows.

Session Name	Week	Weekday	Date	Time	Instructor
WRK01/01	5	Monday	28 March 2022	12:30-15:30	Jennifer Huang
WRK01/02	5	Tuesday	29 March 2022	10:30-13:30	Xiaolu Hu
WRK01/03	5	Tuesday	29 March 2022	12:30-15:30	Giang Hoang Hoang
WRK01/05	5	Wednesday	30 March 2022	14:30-17:30	Jennifer Huang
WRK01/06	5	Wednesday	30 March 2022	17:30-20:30	Haoyi Luo
WRK01/08	5	Thursday	31 March 2022	8:30-11:30	Rui Huo
WRK01/09	5	Tuesday	29 March 2022	14:30-17:30	Haoyi Luo

It follows “first come first serve” rule. So please act quickly when the system is open, in order to select your preferred time slot. You will stay in the selected session for the trading sessions in both Week 5 and Week 8. And your session instructor will mark the two tasks of your Assessment 2.

● Attend your selected live dealing session 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., you can even use Crypto futures to earn short-term profit, but also mind the potential loss).

● You can trade anytime after your instructor’s demonstration, till the end of Week 6, 23:59 Sunday, 10^th April 2022. 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 23:59 Sunday, 10^th April 2022.

● 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.

● When you finish your last demanded trade, please download your trading history from the system. It is not necessary to flatten (close out) all your open positions. It is also 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.

● 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: (2 marks)

Give an overview of your trading objectives.

2. Summarize your hedging strategy (8 marks)

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 23:59 Sunday, 10^th April? 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 (5 marks)

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

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: Individual Trading Session 1 – Report 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:

1. CME Group:

https://www.cmegroup.com/

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

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 (2 points) the submission is late. Submissions that are late by 7 days or more will not be marked and zero marks will be awarded.

An application for extension of an assessment task of up to seven calendar days after the original submission due date must be lodged with the course coordinator via email, and where appropriate supporting documents such as a medical certificate in case of illness should be provided. If you're prevented from submitting an assessment on time by circumstances outside your control, you may apply in advance (at least one working day before the assessment deadline) for an extension to the due date of up to seven calendar days.

Apply for extension:

Fill the Microsoft online form 

or

Download and complete an Application for extension of time for submission of assessable work form (PDF) and submit it to the RMIT School that runs the course.

If you require an extension of greater than seven days, you must apply for special consideration. However, if you have an equitable assessment arrangement which provides for negotiation of submission dates with relevant academic/teaching staff, extensions of more than seven days may be considered.