BAFI1029 Derivatives and Risk Management

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

Report and Excel

  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 CME 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 the 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 $1,100,000 on the trading session day. For student whose student number end with even number, assume you hold a Nasdaq 100 index fund worth $1,100,000 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).

●    Speculation strategies can be based on a forecast period of up to one month. However, all positions must be opened during the assessment trading period (from week 8 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 can trade any time after your instructor’s demonstration, till any date till any date before 19th September 2025. However, you need to trade for at least 5 trading days (i.e., you need to start trading at least 1 week before the deadline), ideally more than two weeks to observe the market fluctuation.

●    You can trade as many times as you want if 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.

Note: Please remember to leave some time to consolidate your trading record and report. For example, someone wants to stop trading on 12 September 2025 and prepare excel and report between 12-19 September, some others want to trade till 18 September 2025 and prepare the report and excel for several hours or weekend. Both are good if you are confident about your submission quality.

●    You can take both long and short positions in future contracts. Your orders might be rejected by the system because of margin shortage or market closing. When your account balance drops to near zero, you are out of the game.

●    Please use the excel template to record your trading and balance daily, and whenever you make a trade. It is not necessary to flatten (close out) all your open positions on your last trading date (especially for hedging purposes). It is good practice to keep a record of your daily  account balance, profit, loss, and 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   future  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  more Cash if you believe the investment opportunity is not good enough but also need to justify this decision in your report.

IMPORTANT: Please ensure you take clear screenshots of all your trades, positions, and your account balance from the CME platform and include them in the appendix of your report. Screenshots serve as proof of actual trading activity. Failure to provide them will result in mark deductions.

  CME Institute Trading Simulator

The 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. Access to the simulator is free, all you need is aCME Group Loginaccount, which can be created using your own email. Please create an account before or during the workshop.

  Marking Guide

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 of how you use future products to hedge your index price risk. The content should include but not limited to:

•   What is the current market situation? Do you think it is necessary to hedge your equity price risk? What percentage of your exposure you think you should hedge?

•   Which future product(s) you use to hedge your risk, outline their basic specs?

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

3.    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.

4.   Record your transactions

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

5.   Analyse the trading performance

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  50%  limits  allocated  on  speculation  too  high?  And  why?  What  are  the differences between speculation/arbitrage and hedging? 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?

Total=15 marks