Reference no: EM133122915

BAFI1026 Derivatives and Risk Management Assessment

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.

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

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 Tuesday, 12nd 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 Tuesday, 12nd 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.

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.

Give an overview of your trading objectives.
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 Tuesday, 12nd April 2022? 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?

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?

Attachment:- Derivatives and Risk Management.rar