BAFI1029 Derivatives and Risk Management

Assessment 2 - Task 2 - Individual Trading Session #2 (15%)

Report and Excel

Due Date: Week 10 - Friday, 21st March 2025 by 23:59 (Singapore Time)

Assessment Task

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/or take advantage of speculation. In the #2 trading session, you will focus on Equity Index 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:

●    Attend your local class in Week 8. Use the GME Group account created in Week 5.

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

●    Your trading aims to hedge your risk exposure to the stock market risk as well as generating short-term profit. For student whose student number end with odd number, assume you hold a S&P 500 index fund worth $2,000,000 on the trading session day. For student whose student number end with even number, assume you hold a Nasdaq 100 index fund worth $2,000,000 on the trading session day. You aim to use Equity index future products to hedge your price risk.

●    You also have $100,000 USD cash on hand at the beginning of your trading. You must use at minimum 50% of your account balance to hedge your stock price risk. Meanwhile, you are allowed to have up to 50% of your account balance to speculating/arbitraging, and the speculation/arbitrage  products are not limited  to Equity Index futures (e.g., other future products, you can even use Crypto futures to earn short-term profit, but also mind the potential loss).

●    Please reset your game from GME Group simulator before your Task 2. Then you can trade any time after your instructor’s demonstration, till any date before 21st March 2025. 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 the future contracts. Your orders might be rejected by the system because of margin shortage or market close. When your account balance drops to near zero, you are basically out of the game.

Note: Please remind to leave some time to consolidate your trading record and report. For example, someone wants to stop trading on 15th March 2025 and prepare the excel and report between 16th-21st March, some others want to trade till 20th March 2025 and prepare the report and excel in several hours or one day. 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. It is a 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, you will need 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 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.

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.

Your report must include the following sections:

1. Trading objectives:

Give an overview of your trading objectives.

2. Summarize your hedging strategy

Provide a summary on how you use Equity Index future products to hedge your stock market price risk. The content should include but not limited to:

•   How much percentage do you hedge your portfolio? And why?

•   What strategy you employed to hedge (e.g., delivery month, contract price, contract amount, long or short, etc)?

•   What is the performance of your hedging by the end of your last trading date? And how the spot price change for your fund holding?

3. Summarize your speculation trading

Provide a summary on how you use future contracts to speculate/arbitrage during your trading period. The content should include but not limited to:

•   Do you think the 50% limits allocated on speculation is too high? And why? Do you feel speculation is risky from your trading exercise?

•   How the speculation performed and explain your profit/loss?

•   How your speculation strategy differs from last time (Trading session 1)? Total=15 marks

Submission

•   The report should follow a structured format, starting with an executive summary and followed by sub-sections addressing all questions/tasks. Essential components of the report include page numbering, sections numbering, main body, executive summary, reference list, introduction and conclusion.

•   The report should be no longer than 1000 words (-/+  15%), excluding executive summary, references and appendix. The  student can have up to 2-page appendix. Citation and reference must be provided where necessary. The Excel file contains your workings to support the reported analysis.

•   Please prepare the report and a spreadsheet to record your trading activities for Assessment Task 2, submit them along with those for Assessment 2 Task 1.

•   All submissions must be made electronically on Canvas, accompanied by acover sheet, through  Canvas  =>     Assignments  =>  “Assessment  2:  Report  and  spreadsheet submission”.

•   The submission must be using 1 or 1.5 spacing and 12-point Times New Roman font.

• Students must ensure their reports are free from academic issues like copying, plagiarism, sharing work, collusion, and collaboration with other groups, maintaining a similarity rate below 30%. Academic misconduct can result in course failure, permanent academic records, and graduation delays due to the investigation time by the COBL Integrity office.

•   Students are required to keep back-ups of all submitted work just in case any are lost.

•   The instructor of your enrolled trading session will mark your assessment.

Note:

●    This instruction includes suggestions on items to include in the report, more information for parts you think are important may be included as you feel necessary, keeping in mind the word limit.

●    The teaching team is not supposed to comment on your calculation workings or identify where your calculation mistakes. The teaching team will provide guidance to make sure that you are on the right track. However, it is still your responsibility to investigate your work and identify the errors.