Understanding of the future market and risk management

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Reference no: EM133873745

Assessment Task - Individual Trading Session

This is an individual task. In this assessment, students are required to use the Trading Simulator tool from CME Group to trade on future products to hedge risk and take advantage of speculation/arbitrage. In the #2 trading session, you will focus on Equity Index and Interest Rate future products.

The goal of this individual assignment is to gain a better understanding of the future market and risk management process, by testing and refining your trading strategies.

Below are the steps you need to follow to accomplish the task:

In week 3, you have enrolled in the trading session from your timetable system. Check the session you enrolled in from the following 5 slots and attend your selected trading session in week 9.

Attend your selected dealing session in Week 9. Use the CME Group account created in Week 5.

Your instructor will use 1.5-2 hours to go through the task, elaborate the basic specs of Equity Index future products, explain the trading rules and demonstrate how to trade. You can start trading after your instructor's demonstration.

Your trading aims to hedge your risk exposure to the stock market risk, interest rate risk as well as generating short-term profit from speculation.

Assume you are the treasurer of a multinational airline company based in the United States. Your company invested in index funds and plans to sell it in the next three months.

For students whose student number ends with an odd number, assume your company holds an S&P 500 index fund worth $1,000,000 on the trading session day. For students whose student number ends with an even number, assume your company holds a Nasdaq 100 index fund worth $1,000,000 on the trading session day.

For all students, assume your company plans to borrow $5,000,000 for three months starting on July 1 to cover short-term funding needs. The interest rate will be the three-month SOFR plus 1%, quoted with quarterly compounding, and determined on the loan start date (at the beginning of the loan period). Your company wishes to lock in the interest rate for this loan today.

You aim to use Equity index futures and Interest rate futures products to hedge your price risk.
You have $100,000 USD cash on hand at the beginning of your trading. Your primary objective is to hedge risk exposures using futures contracts and minimize them as much as possible. Once the two risks are fully hedged, you may use the remaining balance for speculation or arbitrage on any futures contracts to seek short-term profits-but be mindful of potential losses. Speculative or arbitrage positions must not exceed 40% of your account balance at any time. Participation in speculation or arbitrage is optional, but if you choose not to engage in it, you must provide a strong justification for your decision.

Speculation strategies can be based on a forecast period of up to one month. However, all positions must be opened during the designated trading period (from week 9 to the submission date). You can open a position and close it within the same day, several days, or on a certain day within a month. You can trade any futures contracts available on the CME platforms.

Please reset your game from CME Group simulator before your Task 2. You should start trading and hedge your exposure from week 9, after your instructor's demonstration, till any date before 26 May 2025. You are expected to trade for at least 7 trading days. You can trade as many times as you want, as long as you can justify your trading philosophy. You can do some trials at the beginning of the trading period to get familiar with the platform. When you decide to officially start to implement your strategy, please do not reset the game before your last trading date.

You can take both long and short positions in futures contracts. Your orders might be rejected by the system because of margin shortage, market closing, or over 10 contracts per product at once. When your account balance drops to near zero, you are basically out of the game.

Note: Please remember to leave some time to consolidate your trading record and report. For example, someone wants to stop trading on 21 May 2025 and prepare the excel and report between 21-23 May, some others want to trade till 23 May 2025 and prepare the report on weekend. Both are good, as long as you are confident about the quality of your submission.

Please use the excel template to record your trading and balance on a daily basis, or whenever you make a trade. It is not necessary to flatten (close out) all your open positions (especially for hedging purposes). It is good practice to keep a record on your daily account balance, profit and loss as well as open positions, to facilitate consolidating your report. Please do note that the template is just a basic version provided by the teaching team, feel free to modify it to satisfy your needs.

Based on your trading history, profit/loss from your futures account, and the income/cost from your physical asset, you need to form a report to summarize your trading exercise.

Note: Since the contracts can't be bought in a fraction, a tiny variation from the specified budget is acceptable. You can choose to hold some Cash if you believe the investment opportunity is not good enough but also need to justify this decision in your report.
Please take a screenshot of your Open Positions and account P/L (from CME as below) at the end of your last trading date and attach it to the report appendix. Get online assignment help from Ph.D. experts!

CME Institute Trading Simulator
Trading Simulator replicates live futures markets by leveraging real market data. A constant stream of new prices informs your strategies for CME Group's top products across all 6 asset classes, including Bitcoin and Micro E-mini futures. The Access to the simulator is free, all you need is a CME Group Login account. Please create an account before trading.

Marking Guide
Your report must include the following sections:
Trading objectives: (1.8 marks)
Give an overview of your trading objectives.

Hedging/Speculation strategy (6 marks)
Summarize your hedging strategy (Equity risk - 2 marks & Interest rate risk - 2 marks)
Provide a summary of how you use Equity Index futures and Interest rate futures products to hedge your risks. The content should include but not limited to:
How much percentage do you hedge your portfolio? And why?
Which future product(s) do you use to hedge your risk? Outline their basic specs.
What is your hedging strategy (e.g., delivery month, contract price, contract amount, long or short)?
Explain each point in details.

Summarize your speculation trading
Provide a summary of how you use futures contracts to speculate/arbitrage during your trading period. The content should include but not limited to:
What is your speculation/arbitrage strategy?
What futures contract do you use to speculate/arbitrage? And why? Provide analysis of the market, industry, and underlying assets of futures contracts.

All transactions/deals (for both hedging and speculation) are clearly recorded, reported and explained (3 marks) - in consistency with your trading strategy

Performance is clearly analyzed - in consistency with your trading strategy
How does the spot price change for your fund holding? What is the performance of your hedging by the end of your last trading date (for the physical exposure position, the futures hedging position, and the combined position of fund holding and futures contracts)?
How did the speculation/arbitrage perform, and explain your profit/loss?
Is your profit/loss consistent with your trading plan? Why? What factors affect your trading performance?
Are the 40% limits allocated on speculation too high? And why? Do you think speculation is risky based on your trading exercise?
How do you feel when you experience losses from the speculation?
What lessons do you learn from the speculation trading exercise?

Format and Information source

Reference no: EM133873745

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