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
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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 (cite
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sources) 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
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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
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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
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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.