FINC6010 Derivative Securities Assignment
2025 S1

CME Group is the world’s leading derivatives marketplace. The group has four exchanges, CME (Chicago Mercantile Exchange), 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.

Please register your account by clicking on this link:

You can refer to the screenshot below after successfully registering and logging in to your account:

This assignment integrates AI-assisted learning and job market insights to enhance your financial skills and career readiness. Through the study and analysis of real-life derivative trading, you will develop a deeper understanding of various derivative instruments and gain hands-on experience in evaluating derivative contracts.

By applying theoretical concepts to real-world scenarios, this assignment will sharpen your analytical abilities, improve your practical knowledge, and better prepare you for job interviews and careers in the financial industry.

For all general and/or academic enquiries, please email: [email protected]

Cogniti.AI is an AI-powered learning assistant designed to support your understanding of derivative securities and trading strategies. It encourages critical thinking and problem-solving by guiding you through theoretical concepts and real-world applications rather than directly providing answers.

For this assignment, Cogniti.AI will help you:

You can access Cogniti.AI here: FINC6010 - CME Trading Assignment Helper Chat

Please use your University of Sydney student email to register your account. After logging in, you can refer to the screenshot below for further instructions.FINC6010 Derivative Securities Group Assignment 2025 Semester 1

The S&P 500 Index, a critical benchmark for U.S. large-cap equities, has demonstrated substantial growth over the past decade. As of January 2025, the index reached 6,040.53, reflecting a 2.7% increase from the previous month and a 24.66% rise over the past year. This impressive performance has been largely driven by investorenthusiasm for artificial intelligence and significant gains in major technology stocks. Companies like Nvidiaand Meta have seen substantial stock increases, contributing to the S&P 500's robust performance.However, the market faces potential volatility due to ongoing geopolitical tensions and economic factors. Analysts at Stifel anticipate that the S&P 500 may peak in early 2025, followed by a 10-15% decline in the latter half of the year, influenced by concerns over slowing economic growth and persistent inflation.

1. In your trading simulator, click on “Equity Index”, and these are Equity Index derivatives. Analyze historical data from Dec 2024 to Feb 2025 on the CME platform and assess potential price movements in light of geopolitical and market trends. Summarize key insights, including predictions for price volatilityand opportunities for profitable trades. (1 mark)

2. Based on Part 1, ask Cogniti.AI under what circumstance a short position, and a long position should beused? Then develop and execute trading strategies for the 5-day period on the CME Trading Simulator. Inthis context, your task is to trade two June 2025 E-mini S&P 500 futures contracts over a 5-day tradingperiod, with the objective of generating profits. Please record trades with screenshots. At the end of the trading period, calculate your total Profit and Loss (P&L) and evaluate your strategy’s effectiveness. Reflecton how geopolitical events and market volatility influenced your decisions and explain the rationale.

Critically assess the role of Cogniti.AI in shaping your trading approach, highlighting its strengths and limitations. (2 marks)

In December 2024, the Australian dollar (AUD) experienced a sharp decline, reaching a 13-month low of 63.36 US cents before slightly rebounding to 63.9 US cents. Although the AUD showed some recovery in early January 2025, as a financial expert, you anticipate continued volatility in the AUD in the near future.

1. Analyze and forecast the price movement and trends of the AUD exchange rate. Conduct independent research to identify the key drivers of these trends, including geopolitical, economic, and market-related factors, and discuss the reasons behind your forecast. (1 mark)

Question 3 (2 marks)

As of February 15, 2025, Bitcoin (BTC) is trading at $97,525, reflecting recent market volatility following its all-time high of $103,804 in late 2024. BTC’s price has been influenced by favorable political developments, including the re-election of President Donald Trump and the appointment of pro-crypto regulators. However, profit-taking, shifting Federal Reserve policies, and global geopolitical tensions have led to price fluctuations.

Given this backdrop, your colleague Cecilia is managing the April 2025 Bitcoin (BTC/USD) futures contract(BTCJ5), currently priced at $99,160. Her objective is to execute trades that capitalize on market movements while effectively managing risk.

In your trading simulator, navigate to "Cryptocurrencies" → "Cryptocurrency Derivatives", and locate the BTCJ5 futures contract.

2. Place a MKT (market) order in the trading simulator in one of the cryptocurrencies - Bitcoin or Ether and take a screenshot showing your trade. Explain the potential risk Cecilia is exposed to assuming the order is pending. Consider potential liquidity risks, price slippage, and extreme market events (e.g., regulatory changes, sudden market shocks) that could affect the overall trade performance. Explain with examples. (1 mark)

As a financial expert, you are tasked with constructing and evaluating a bear spread using put options on the Silver option contracts. You will leverage Cogniti.AI for both theoretical understanding and real-world trading insights.

1. Ask Cogniti.AI “What is a bear spread?” Summarize Cogniti.AI’s response, focusing on the definition, construction, and purpose of a bear spread. Include the advantages and risks of using this strategy. (1 mark)

Question 5 (4 marks)

1. Present your comparison in a single, well-constructed chart that clearly visualizes the price movements of all three currencies. Select a 3-month time window for your analysis. Evaluate the correlations between the price movements of the three currencies during this period. (1 mark)

2. Summarize and input your findings in the CognitiAI. Identify which currency poses the highest risk to theportfolio. Ask CognitiAI to recommend an appropriate hedging strategy using futures contracts, specifyingthe position (long/short) and contract details. Execute the trade and provide screenshots. (1 marks)

3. Execute a contrarian trading strategy against the AI-recommended approach. For example, if AI suggests a long position on a currency, you must go short. Place the required orders in the trading simulator and take screenshots. Compare the trading results of your contrarian strategy vs. AI-driven strategy, evaluating whichapproach performed better by analyzing returns, market conditions, price movements, and risk exposure. (2 marks)

Question 6 (3 marks)

1. Identify an appropriate options trading strategy using corn call options (either long/short). Discuss how thisstrategy limits downside risk while enabling you to benefit from price increases. Record or providescreenshots of the strike prices, option premium, and the net cost of implementing your strategy. (1 mark)

2. Create a payoff diagram that visualizes the profit and payoff of the spread across the range of corn prices atexpiration. Clearly label key points, including breakeven prices and maximum profit/loss levels. (1 mark)

3. Construct a profit and payoff table showing outcomes for the strategy at various corn prices at expiration.(1 mark)

Question 7 (4 marks)

Reserve's monetary policy has also played a crucial role. Speculations about potential interest rate cuts have further bolstered gold's appeal, as lower rates reduce the opportunity cost of holding non-yielding assets like gold. Analysts suggest that if the Fed signals multiple rate cuts in 2025, it could reignite bullish momentum for gold.

While gold prices have surged due to geopolitical tensions and central bank demand, future movements remain uncertain. If geopolitical tensions persist or intensify, gold prices could continue to climb as investors seek safe-haven assets. However, if geopolitical risks ease, investor demand for gold could diminish, leading to a sell-off.

Additionally, a stronger than expected U.S. economic recovery or higher interest rates from the Federal Reserve could strengthen the U.S. dollar, reducing gold's appeal. Rising bond yields would further increase the opportunity cost of holding non-yielding gold, exerting downward pressure on prices. Moreover, if central banks, particularly in emerging markets, slow their gold purchases or liquidate reserves to stabilize domestic currencies, this could significantly impact gold demand. Analysts caution that a break below $3,200 per ounce could trigger technical selling, while sustained geopolitical risks could push prices higher toward $3,500 or beyond.

1. Based on the scenario above and the recent market dynamics, you have a neutral outlook on the market.

You anticipate that gold could sustain its record performance into June 2025, with prices ranging between $3,050 and $4,150 per ounce. In your trading simulator, navigate to "Metals" and find the June 2025 maturity option contracts for gold. Design an options trading strategy using call options to generate a profit if the gold price stays within this specified range, while limiting losses if the price moves significantly outside of it. Clearly identify the underlying asset, the strike prices, the expiration date, and the opening and closing transaction times for each call option contract. Provide screenshots of all trading activities to support your analysis. (2 marks)

2. Based on (1), specify the conditions under which this strategy yields a profit, explaining the underlying factors and market dynamics that contribute to these outcomes. Calculate the breakeven points for the strategy and include them in your analysis. Evaluate whether the breakeven points and the Profit and/or Loss (P&L) at maturity from your calculations align with the CME P&L. If there are any discrepancies, discuss them in detail and provide a clear explanation of why these differences may occur. (2 marks)

Question 8 (3 marks)

2. Discuss the pros and cons of the straddle spread created by Cogniti.AI, highlighting its strengths as well as potential drawbacks. Finally, if you were the investor, would you choose to implement this strategy or not?

Provide a clear and well-reasoned explanation, addressing whether the strategy aligns with your expectations for the gold market and your personal risk tolerance. (1 mark)