2022-Midterm Assignment

Q1: FUTURES:

As a sophisticated energy trader, you apply your knowledge to both crude oil and natural gas
markets. Starting Jan 1st 2015 you decide to implement the following rules

The day following expiry of the front month contract, you are going to go long one front month and
short two 2nd month contract and long one 3rd month contract if the markets are in backwardation,
and short the front month and long the 2nd month if the markets are in contango. You will hold the
position to expiry and then take profits.

You will do this monthly

You initially have $1 million to start

Each time you enter into a monthly position, you try to split the capital equally amongst the
commodities.

You set up the capital so that you never use more than 25% of the capital to try to avoid
bankruptcy. Your capital account earns 50 basis points for capital not locked up in the margin
account.

The risk team at your custodian doesn’t offer offsetting margin, but will only require you to post
margin for the long-side of the position. The initial margin is 20% and the maintanance margin is
10%. You only put in cash to cover the initial margin in your margin account, the rest sits in a
capital caccount earnig the 50bps.

 What is the dollar PnL of the Crude Oil position
 What is the dollar PnL of the Nat gas position
 How often were the markets in contango (as a % of the total)
 How profitable was the combined strategy in contango markets (in dollars)
 How profitable was the combined strategy in backwardation (in dollars)
 How many total margin calls were there?

When entering into Moodle form (DO NOT INCLUDE $ symbol)














Q2: SWAPS.

Assuming 5 years ago (starting March 1st 2017) you entered into a 10 million AUD annual payments
total return equity swap with receive ASX returns (in AUD) / pay HANG SENG returns (in AUD).
Calculate the following,

 The cash flow received or paid in 2018,2019,2020 & 2021, & 2022 ($ in Millions)
 What is the current value of the swap?
 Explain your answer for the current value . (Qualitative)


Q3: OPTIONS
You are the manager of $500 million equity portfolio with a beta of .6, and you are concerned about
the market retracing to 2020 lows by September. You have an excellent quant division that can help
you price any instrument. You can use SPX options or futures to manage your risk. If the market did
retrace to those lows,
 How many futures would you need to have a return of 0% over the period
 How many put options would you need to have a return of 0% over the period-(hint: you have
to find the optimal strike)
 If you were wrong, and the market went up in value, what is the breakeven upside price for
the SPX that would result in the put strategy outperforming the futures strategy.


When entering into Moodle form (DO NOT INCLUDE $ symbol)