代写BAFI 1026 – Derivatives and Risk Management Assessment 2 Task 1: Individual Trading Session调试数据库编程

BAFI 1026 – Derivatives and Risk Management

Assessment 2 Task 1: Individual Trading Session (15%)

Frequently Asked Questions

1.   Suppose I’m the airline treasurer and the price of jet fuel rises. The profit I earn from my

energy futures would offset the higher cost of buying jet fuel in the cash market. But if I’m using a jet-fuel futures contract (no cross hedge), can I simply let the futures contract expire and take delivery of the jet fuel at the contract price, rather than using the futures profit to offset the increased cash-market cost?

Yes, if the futures contract is specifically for jet fuel (not a cross hedge), you can hold the contract until expiration and take physical delivery of the jet fuel at the futures price if your futures contract allows for physical delivery, not cash settlement.

However, if you take physical delivery, you must comply with contract specifications, such as delivery location, storage, and quantity. Many companies prefer to close futures positions before expiration to avoid logistical challenges.

Moreover, for futures, it is not “expire” for the contract, it is “delivery month”. That means, in real life, if investors fail to flatten their open positions, they will face physical delivery.

Also remember, there are no "jet fuel oil futures" available on the market yet. Even you receive or deliver crude oil or heating oil, you cannot directly use it to fly the plane (sell it to airlines). So, I would suggest, by the end of the trading session (25th April), close out the contracts who are very near the delivery month, but still can keep those longer-term contracts open.

2.   In real life, we must top up the cash to our initial margin if the price of the future falls below

the maintenance margin. In the simulation, is the margin requirement the initial margin or maintenance margin? Why does the value in my margin balance change constantly?

In the CME simulation tool, it is the initial margin. It changes along with the change in the value of your assets. See more details from Topic 4 lecture slides. Basically, you take a long position, when the price of your futures contract rise, your margin account balance increases, otherwise, decreases. In real life, when it decreases to a level (maintenance margin), your broker calls you (margin call). In this game, nobody will call you, but the system will force a flattened transaction on your contract to keep the margin at a certain level.

3.   What is the maintenance margin? Will I receive a "Margin Call"?

In real life, each broker will define their own margin requirement. CME providessome guidance for each contract. Normally 10-15% down from the initial margin.

You will not receive a Margin Call, instead, the tool will flat your position when the margin goes below the maintenance margin. I would suggest keeping an eye on your contract if you expect a very volatile change in the short term if you want to avoid the forced flatten.

4.   Where do we find the end price of the futures contract that is needed to record into the excel spreadsheet? Is it okay if I can't find the closing price for some day?

See the following screenshot: choose D on the left side of the candle (default is 5 mins, we need to manually change it to 1 Day); then the second red circle is the close price, when you click each day, it will show your close price (C).

If the closing price is missing without a formal close, holiday, or low liquidity contract, you can carry forward the last available price or use mid-market quotes from other data providers/websites. Some data providers will quote a mid-point (bid/ask average) at a specific time - say 3:30 PM - even if the contract doesn’t formally close. This can serve as a proxy “closing” price. Whatever approach you choose, explain it in the excel file: settlement prices, carried-forward  prices, proxies.

 

5.   My trading records are wrong from the downloaded excel?

System bugs could happen in the platform. That's why you are strongly encouraged to use thetemplateor design your own spreadsheet to record your trading and balance. The bottom line is, in the report, you can show your end balance with a screenshot and explain your P/L.

6.   How do we check the margin per contract? But I find there's a difference between the margin

recorded in the order receipt right after I execute the order, and the margin that is recorded in the end of the website (in the account balance area)

You can find the margin per contract in the order confirmation/receipt window that pops up after you make an order to buy or sell 1 contract. It is what the system checks before letting you trade.

The margin requirements in the practice account details on CME aren’t always a simple “initial margin × number of contracts.”  There could be many reasons. For example, CME will give you margin relief when you hold offsetting or related positions. These positions are less risky together than individually, so CME reduces the combined initial margin. Brokers may also tack on a small buffer above the exchange’s initial margin to reduce the chance of a margin call.

Thus, stick with the initial margin in the order confirmation window to record the margin per contract.

7.   Can l use options to hedge?

Sorry, no. The assessment requests to use Futures. However, it is highly recommended to try to trade options (for fun) in leisure time.

8.   Any tips on the hedging risk?

Check out "basis risk" in lecture slides Topic 4, a mismatch between underlying assets and derivative products.

9.   ls the correlation shown on instruction slides the same as the rho in lecture slides on topic 4? Do l need to calculate the minimum variance hedge ratio?

No. The correlation in the instruction slides it showing the comovement between the jet fuel spot price and other oil products' spot prices. The rho in Topic 4 slides is the correlation between spot and futures prices.

No, you do not need to calculate the ratio (as explained in the instruction slides). But what you can do is explain how to calculate it and use the spot price correlation to explain the potential basis risk.

10. When l calculate the number of contracts l am taking, should l just consider the units, or consider value as well? (The formulas in Topic 4 slides)

Both works. In a very short term (less than 2 weeks for our assessment), the number should be very close to each other. For simplicity, unit is suggested, while I am open to the idea of using value.

11. Did we need to calculate basic risk? ln this part, do l need to find out some risks or just mention the Basic risk? Do l need to talk about its solution?

When you get to the Basic risk section, you should define the basic risks, explain what it means in your context (e.g., the risk that your hedge doesn’t move perfectly one-for-one with the underlying exposure) and list the key drivers of that risk (e.g., timing risk, quality/spec mismatch).

You are not required to calculate it, but you need to explain and apply it correctly. If possible, provide a table of past spot vs. futures price differences.

Also, you need to explain how your trading strategy reduces the risk such as using nearer-term vs. longer-term contracts to match timing or adding cross-hedges.

12. Assume I am the jet fuel oil producer, and I am going to sell 12,000 barrels of jet fuel oil in 3 months. Thus, l will sell the optimal amount with the price higher than the spot price during the next 3 months. And “sell” here means l open a short position and not close it until the delivery date. So, does it mean that, no matter how many times l go short and flatten the deals during the trading period, at the end of the trading period, l must leave the optimal number of contracts open to ensure that l really sell those amount of barrels? lf not, what is the objective of hedging risk if we dongt actually sell it.

You may adjust your position over time based on changing forecasts, but at the end of the 3 months, you should still have the necessary short futures contracts open to hedge the full 12,000 barrels. Note that, if you keep closing and reopening positions, you might benefit from short-term price fluctuations but also expose yourself to risk if prices move against you.

13. Where can l get the jet fuel price?

You can get the jet fuel price from any reliable source (remember to cite it) such as the IATA website. However, this website releases the price every Friday only.

14. Do we need to explain or justify the product price and date that we were trading?

Yes, you should always explain why you picked a particular contract (product), price level, and trade date. That justification shows you’ve thought through the economic and practical drivers of your hedge.

15. In the hedging performance section, if the price changes differently than I expected, do I need to explain why it was different?

Yes. Whenever your hedge doesn’t behave exactly as you projected, you should explain the reason behind that divergence.

16. How long should I hold my position?

You should hold it for at least 10 working days to observe the price fluctuations and explain your P/L.

17. Do we need to take screenshots of our trading simulator and include it in the report?

Yes. You need to take screenshots of your trading position and balance as in the image below and include it in the appendix of your report.