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FINC6010 Derivative Securities Assignment
2024
This assignment is designed to help USYD students to study and analyze real-life derivatives trading and to prepare for their future trading-based job interviews and careers in the financial industry. Students with a strong motive to self-study a wide range of derivatives contracts will benefit from working on the assignment and its related materials.
Due time for submitting the assignment report is Week 11, May 6, 23:59.
The deadline cannot be deferred further. If you or your team want to ask for special consideration, please contact the student center for formal approvals.
Upload your assignment work in Word format (.docx) or pdf format (.pdf) from “Assignments” tag on Canvas.
CME Group is the world’s leading derivatives marketplace. The group has four exchanges, CME (Chicago Mercantile Exchange, established in 1848), CBOT (Chicago Board of Trade), NYMEX (New York Mercantile Exchange) and COMEX (The Commodity Exchange). These four exchanges offer a wide range of trading benchmarks for all major asset classes. CME Group’s website (https://www.cmegroup.com/) provides comprehensive information on derivatives trading and can be used as the major information source of this assignment.
Student teams from University of Sydney’s FINC6010 course are going to investigate derivative securities trading using the trading simulator provided by CME. The simulator can be accessed after registration (free) and login (see the following link). Initially, each trading team will have $100,000 to trade but you do not need use all the amount.
https://www.cmegroup.com/trading_tools/simulator.html
The investigation report should be in a Questions/Answers format (you don’t need a cover page, executive summary, introduction etc.), answering the questions listed below in sequence.
The 10-page report should include everything the student team wants to report. The submitted report should not be more than 10 pages.
“Everything” means student traders should not send an enquiry email, asking whether certain items are included in the 10-page limit. The answer is always - yes included.
Please provide some screenshots at the end of your report to show your actual trading practice. Reports without any trading evidence will incur 5 marks penalty.
Student(s) sending in emails, asking whether an item is included in the 10-page limit, will incur 3 marks penalty.
You or your team do not need send group formation information by emails or register group information on canvas. You can form a group with students in different tutorial classes. One-member groups are fine. Groups should have no more than 6 members.
Student(s) sending in emails, asking whether they can form groups across tutorial classes, will incur 3 marks penalty.
The report does not need a separate cover page. Put student IDs and student names of your team on the first page of the report. For each team, only submit one document and once. Please put “(submitter)” after the submitter’s name.
For example: Green Soros (submitter), SID 123456; Walsh Buffett, SID 234567; Jack Rogers, SID 345678.
Example for one-person team: Joe Soros (submitter), SID 987764.
Make sure your SID is correct in your report. Incorrect SID will significantly delay your mark release.
The report can use charts, tables, calculations, screenshots, or references (citesources) for explanation purpose. There is no font size or line spacing constraints if others can read your report. Try to summarize the information and write the report within the 10-page limit.
Marks: 1 mark for question 2; 2 marks for question 1, 3; 3 marks each for questions 4, 5, 6, 9; and 4 marks for question 7, 8 (25 marks in total).
Login and open the CME simulator using your practice account. The questions are as follows.
1. After several rate hikes in the post-pandemic period, looking ahead to 2024, the U.S. Federal Reserve (Fed) and the market both expect that the US policy interest rate will gradually peak and then fall. In September 2023, most Fed officials expect the policy rate to be 5.6% in 2023 and 5.1% in 2024, suggesting rate cuts in 2024. The resulting risk management needs are significant for participants to CME Group. In your trading simulator, click on “Interest Rate” tag and these are interest rate derivatives. Investigate and report the price quotation method of the 3-month SOFR contracts. How to use the 3-month SOFR contracts to hedge against a prospective decreasing interest rate?
2. Look at the main chart of your trading simulator. Click on “Equity Index” tag and these are equity index derivatives. As a U.S. mutual fund manager, you are currently holding a Japanese stock portfolio, which equity index derivatives positions can be used for hedging purpose and why?
3. Click on “Equity Index” tag and you can find E-mini Russell 2000. What does “E-mini” mean in E-mini Russell 2000? Examine the available contracts for E-mini Russell 2000. They have the contract codes such as RTYH4, RTYM4, RTYU4. Your task now is to decipher these codes. Please explain the meaning of (or rules to construct) contract codes for E-mini Russell 2000. What will be the available contracts for E-mini Russell 2000 in year 2028 and what will be their contract codes?
4. The trading desk manager wants you to long two EMDM4 futures contracts with a market order. The manager does not tell you the underlying asset. Please report what is the underlying asset for EMDM4 contract. Provide screenshot(s) to show how you conduct the transaction to establish the long position. Hold your position for at least 1 trading day. Then, try to liquidate your position with profit. It may take some time. Provide screenshot(s) to show how you did it. If your screenshots are too large, then use your computer skill to modify them to fit in your report.
5. You can manage risk in the precious metals markets with CME Group Metals futures and options, getting more liquidity, access, and price transparency for trading Gold, Silver, Platinum, and Palladium on CME platform. Click on “Metal” tag and these are metal derivatives. Use trading simulator chart to compare futures prices of Gold and Platinum, both with October 2024 delivery. Present your comparison in one chart. You may use 3-month (3m) or 6-month (6m) time windows. And summarize the price performance of Gold and Platinum in your chart and communicate the key findings from comparison to your trading desk manager. You need figure out the “key findings” by yourself.
6. Suppose you work for a Japanese Jewelry company. You need to import Gold overseas every year. The derivatives (both futures and options) of Gold are quoted in U.S. dollars (U.S. dollars and cents per troy ounce) on CME platform. Thus, foreign exchange exposure is also a key concern for your company. Click on “FX” tag and these are foreign exchange derivatives. Go to “Japanese Yen FX” panel and look at the quoted price. How is Japanese Yen quoted? If the quoted price is 0.006689, what does it mean? Now check the option series (Select “MONTHLY OPTIONS” at the upper right corner) on futures contract 6JU4. Find which call and put options are closest to be at-the-money and explain how you figure out the answer (provide screenshots).
7. Implement a trading strategy by buying one put at a lower strike price, writing two puts with a higher strike price, and buying one put with an even higher strike price on the RTYM4 futures contracts. All puts have the same expiration date, and the strike prices are equidistant (e.g., buying one put with strike price K1 =10, writing two puts with strike price K2 =20, and buying one put with strike price K3 =30). You need to open and close (within 10 trading days) the long and short positions in put options simultaneously (a short time lag is allowed). Monitor and record the daily profit/loss from this trading strategy and taking screenshots of your positions’ profit/loss. Identify the underlying asset, strike prices, maturity date, and transaction time (open and close time) of option contracts. To construct this strategy, how much do you need to pay (or receive) initially? Under what circumstances do you make a profit from this strategy and why?
8. You have a bullish outlook on the price of corn till September 2024 due to the food crisis. You decide to use a derivative strategy with two call options on futures contract ZCU4 (have the same maturity date but different strike prices) to capitalize on this bullish view. Your strategy should minimize the upfront payment. Explain the construction process of your strategy with screenshots. Calculate the breakeven corn price(s) at expiration. Determine the maximum profit and maximum loss for this strategy. Then, try to liquidate your position without making any loss. It may take some time. Provide screenshot(s) to show how you did it. If your screenshots are too large, then use your computer skill to modify them to fit in your report.
9. Energy markets began to tighten in 2021 because of a variety of factors, including the extraordinarily rapid economic rebound following the pandemic. But the situation escalated dramatically into a full-blown global energy crisis following Russia’s invasion of Ukraine in February 2022. Please go to “Energy” tag and these are energy derivatives available to trade on CME platform. Your manager asks you to construct an option straddle strategy to benefit from high volatility of energy price. The manager tells you the underlying asset is WTI Crude Oil futures contract with delivery in June 2024, but he does not find the contract code. What is the contract code for the underlying asset? Explain the construction process of your strategy with screenshots. Calculate the breakeven oil price(s) at expiration. Then, try to liquidate your position without making any loss. It may take some time. Provide screenshot(s) to show how you did it. If your screenshots are too large, then use your computer skill to modify them to fit in your report.