BAFI1029 Derivatives and Risk Management
Assessment 2 - Task 1 - Individual Trading Session #1 (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 #1 trading session, you will focus on Energy 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 5. Use your email address to create an account with CME Group, during the workshop.
● 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 the instructor’s demonstration.
● Your trading is to primarily hedge your risk exposure to the oil price. For students, whose student number ends with odd number, assume you are the treasurer at an airline company planning to purchase 12,000 barrels of jet fuel oil in three months. For students whose student number ends with an even number, assume you are a jet fuel oil producer planning to sell 12,000 barrels of jet fuel oil in three months. Your objective is to use energy futures products to hedge your price risk. Record the fuel price when you start taking positions on the CME to: (1) Provide background information and justify the number of contracts you go long or short. (2) Show whether you succeed in hedging the risk.
● You have $100,000 USD cash on hand at the beginning of your trading. You must hedge the risk to reduce it to a minimum. You must hedge the risk using Energy futures. Once the risk is 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.
● 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 5 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.
● 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 10 trading days (i.e., you need to start trading at least 2 weeks 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 a CME 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 commodity 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 jet fuel price risk, and what percentage of your exposure you think you should hedge (e.g., ?% out of the 12,000 barrels)
• Which future product(s) you use to hedge your risk, outline their basic specs?
• Are there any differences between jet fuel oil and the underlying assets of your selected hedging product? And what risk can be generated from these differences?
• 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 40% 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