{"id":79376,"date":"2018-02-20T23:50:30","date_gmt":"2018-02-20T23:50:30","guid":{"rendered":"https:\/\/writemyessayfree.com\/derivatives-and-risk-management"},"modified":"2017-08-18T07:41:26","modified_gmt":"2017-08-18T07:41:26","slug":"derivatives-and-risk-management","status":"publish","type":"post","link":"https:\/\/www.benedictsol.com\/blogs\/derivatives-and-risk-management\/","title":{"rendered":"DERIVATIVES AND RISK MANAGEMENT"},"content":{"rendered":"

Learning Objectives<\/em><\/strong><\/p>\n

 <\/strong><\/p>\n

By completing this case you will:<\/p>\n

 <\/p>\n

\u2013 Learn to work with futures and spot data<\/p>\n

\u2013 Estimate hedge ratios<\/p>\n

\u2013 Compute hedged and unhedged valuation changes with historical data<\/p>\n

\u2013 Back-test and discuss possible hedging strategies<\/p>\n

\u2013 Consider how hedge ratio estimates can be employed in dynamic settings<\/p>\n

\u2013 Communicate complex analysis to a non-technical audience<\/p>\n

 <\/p>\n

Learning Activities<\/em><\/strong><\/p>\n

 <\/p>\n

By completing this case you will:<\/p>\n

 <\/p>\n

\u2013 Estimate and\/or compute hedge ratios<\/p>\n

\u2013 Compute cash flows to hedging strategies using energy futures contracts<\/p>\n

\u2013 Comment on the consequences of changing market conditions on<\/p>\n

possible hedging strategies<\/p>\n

\u2013 Write a brief report for a non-technical audience<\/p>\n

 <\/em><\/strong><\/p>\n

Task<\/em><\/strong><\/p>\n

 <\/p>\n

You are an associate at a commercial bank. One of your colleagues has sent the<\/p>\n

following email:<\/p>\n

 <\/p>\n

\u201cThanks again for sending Hull\u2019s chapter on hedging with futures. As you<\/p>\n

know we do a lot of work with energy-intensive companies, so one of his<\/p>\n

examples seemed especially relevant. His cross-hedging strategy (jet fuel and<\/p>\n

heating oil) is interesting, but we were wondering what would happen in<\/p>\n

turbulent markets? For example in 2014 crude oil dropped from about USD<\/p>\n

100 per barrel to around USD 50 per barrel. What would happen to someone<\/p>\n

using Hull\u2019s proposed strategy over this time? Would it make sense to<\/p>\n

consider other energy futures as part of a hedging strategy (i.e. we have been<\/p>\n

wondering about including crude oil futures in addition to heating oil)?<\/p>\n

 <\/p>\n

Any thoughts you have would be greatly appreciated.\u201d<\/p>\n

 <\/p>\n

Your colleague has limited quantitative skills and so you feel that you can best<\/p>\n

demonstrate these concepts through a clear example, based on data taken from the<\/p>\n

period she noted.<\/p>\n

 <\/p>\n

You consider what might happen over this time to someone who wanted to hedge<\/p>\n

the price risk of 500,000 gallons of jet fuel. You note that the futures data is taken<\/p>\n

from NYMEX where heating oil contracts are quoted in USD per gallon (contract size<\/p>\n

of 42,000 gallons) and crude oil is quoted in USD per barrel (contract size of 1,000<\/p>\n

barrels).<\/p>\n

 <\/p>\n

Your assistant has downloaded spot jet fuel, crude oil futures and heating oil futures<\/p>\n

daily prices from December 31, 2012 through April 18, 2016 (see file \u201cDaily Jet Fuel<\/em><\/p>\n

and Energy Prices \u2013 25762 DRM \u2013 AUT 2016.xlsx\u201d<\/em>). You double check that their use of<\/p>\n

the \u201clookup\u201d function in Excel was done properly so that the combined data is<\/p>\n

correctly lined up through time.<\/p>\n

 <\/p>\n

You basically have two goals. First, you want to see how hedge ratios estimated with<\/p>\n

2013, 2014 or 2015 data differ from each other. Second, you want to note any<\/p>\n

differences between using only heating oil futures versus heating oil and crude oil<\/p>\n

futures to hedge jet fuel price changes across these different time periods. To draw<\/p>\n

your conclusions, you perform the following investigations:<\/p>\n

    \n
  1. i) By using the data in 2013 only, 2014 only, 2015 only and then both 2013-2014, you<\/li>\n<\/ol>\n

    compute and compare the corresponding hedge ratios (thus the optimal number of<\/p>\n

    futures contracts). You also consider hedging with only heating oil futures versus<\/p>\n

    heating oil and crude oil futures.<\/p>\n

      \n
    1. ii) You assess how each of these hedge ratios performs (by comparing standard<\/li>\n<\/ol>\n

      deviations of unhedged and hedged positions), when they are used to hedge the jet<\/p>\n

      fuel price changes in 2015 and 2016?<\/p>\n

      iii) How do these two factors influence the valuation changes \/ cash flows a hedger<\/p>\n

      might have received in 2015 and 2016? What are the main issues you have<\/p>\n

      identified with this hedging application and what are your suggestions to deal with<\/p>\n

      those?<\/p>\n

       <\/p>\n

       <\/p>\n

       <\/p>\n

       <\/p>\n

      \/ <\/strong>2<\/strong><\/p>\n

       <\/p>\n

      Submission Details<\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n

      Please submit both your team\u2019s report and the spreadsheet you used for <\/em><\/strong><\/p>\n

      your quantitative analysis. Both documents will be reviewed in<\/em><\/strong><\/p>\n

      assessing your work. However, please write your report so that the <\/em><\/strong><\/p>\n

      reader does not have to refer to the spreadsheet to understand your key<\/em><\/strong><\/p>\n

      points.  <\/em><\/strong><\/p>\n

       <\/p>\n

      Please submit your team\u2019s written report through the designated <\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n

      assignment box \u2018<\/em><\/strong>Finance 5\u2019<\/strong> located in the Student Lounge, Level 5 of<\/em><\/strong><\/p>\n

      Building 8 by <\/em><\/strong>Friday 27 May at 17h00<\/strong>. You must attach the assignment <\/em><\/strong><\/p>\n

      cover page to this submission.<\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n

      Your submission cannot be more than 4 pages in total (including cover<\/em><\/strong><\/p>\n

      sheet) with at least one inch margins and double-spaced 12 point type. <\/em><\/strong><\/p>\n

      Please submit the spreadsheet you used for your quantitative analysis<\/em><\/strong><\/p>\n

      by using the \u201cAssignment\u201d feature on UTSOnline by the due date. <\/em><\/strong><\/p>\n

      The file name of this spreadsheet <\/em><\/strong><\/p>\n

      should include your team surnames \/ number. <\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n

      You are welcome to discuss your basic approach with current DRM <\/em><\/strong><\/p>\n

      students but all the analysis must be from your team.<\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n

      Please note that the assignment box will be removed and the UTSOnline<\/em><\/strong><\/p>\n

      will not accept submissions after the due date and time.  <\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n

      Please be sure to cite the work of others where appropriate. <\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n

      The quality of your writing is as important as the technical accuracy of <\/em><\/strong><\/p>\n

      your report.<\/em><\/strong><\/p>\n

       <\/em><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

      Learning Objectives   By completing this case you will:   \u2013 Learn to work with futures and spot data \u2013 Estimate hedge ratios \u2013 Compute hedged and unhedged valuation changes with historical data \u2013 Back-test and discuss possible hedging strategies Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-79376","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/79376","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=79376"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/79376\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=79376"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=79376"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=79376"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}