Financial Derivatives Trading: Options, Futures & Swaps

Part A

According to the article of FT.com entitled ‘Oil rises as US crude stocks retreat for third week' (26.04.2017), three major oil forecasting agencies (the US Energy Information Administration, the International Energy Agency, and the Organization of the Petroleum Exporting Countries) ‘forecast that the global oil market will be in deficit in the second half of this year if the cartel maintains its production cuts at its next meeting on May 25'. An extension of production cuts in combination the decline in the US crude stocks will put pressure to the markets and boost prices.

Based on the information above describe how financial derivatives (crude oil futures) could be used in risk management (hedging) and speculation. For your example, please use real data to support your opinion. Your answer should be presented in a professional way (max: 2,000 words).

Part B

Scenario

An equity fund manager holds a portfolio comprising the largest UK stocks and benchmarks the FTSE 100 index.

They are concerned about the possibility of a sharp correction in UK equities within the next three months and would like you to evaluate their hedging choices.

The fund manager has expressed a preference to use exchange-traded derivatives for liquidity and transparency.

Required

1. Portfolio setup
a. Use price data (for index and futures) of a date of your choice, between 11/05/2014 and the submission deadline. Quote the day you have chosen.

b. Size of the portfolio: Units of the FTSE 100 index held in the portfolio are your birthday times 1,000 (e.g. if you were born on 29/02/1992 the fund holds 29 x 1,000 = 29,000 units of the FTSE 100 index.

2. Hedging
a. Explain the risk faced by the fund manager, and how futures could be used to hedge it. (max: 500 words)
b. How many futures should be bought or sold to hedge the position? Show your calculation. Use the appropriate tools to show an equation in your word processor.
c. Confirm your result using the OSA (Option Scenario Analysis) function on Bloomberg. Show a screen cast of the function 32) Hedge position. What is the equivalent to the hedge ratio in the OSA function?

Note: Need only part-B

Attachment:- Financial Derivatives Trading.rar