Hedging Jet Oil Exercise (With Live Hedging Template)

● Your trading is to primarily hedge your risk exposure to the oil price. Assume you are treasurers at airline company, and you are going to buy 10,000 barrels of jet fuel oil in 3 months. You aim to use Energy future products to hedge your price risk, to: 1) provide a background info about/justify how many contracts you go long/short, 2) show whether you succeed in hedging risk. ● As there is no jet fuel oil, you could use Crude oil to assume. ● You have $100,000 USD cash on hand at the beginning of your trading. You must use at minimum 70% of your account balance to hedge your oil price risk. Meanwhile, you are allowed to have up to 30% of your account balance to speculating/arbitraging, and the speculation/arbitrage products are not limited to Energy futures (e.g., you can even use Crypto futures to earn short-term profit, but also mind the potential loss). ● You can take both long and short positions in the future contracts. When your account balance drops to near zero, you are basically out of the game. ● 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.  Instruction Your report must include the following sections: 1. Trading objectives: (2 marks) Give an overview of your trading objectives. 2. Summarize your hedging strategy (8 marks) Provide a summary on how you use Energy future products to hedge your commodity price risk. The content should include but not limited to: • 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 10,000 barrels) • 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)? • What is the performance of your hedging by 23:59 Sunday, 12nd April? And how the spot price change for jet fuel oil? • 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? 3. Summarize your speculation trading (5 marks) Provide a summary on how you use future contracts to speculate/arbitrage during your trading period. The content should include but not limited to: • Why you take speculation position? • How the speculation performed and explain your profit/loss? The report and excel spreadsheet will be submitted. The report should be no longer than 1000 words (-/+ 15%), excluding references and appendix. The student can have up to 2-page appendix. Citation and reference should be provided where necessary. The Excel file contains your workings to support the reported analysis.  Additional Resources: 1. CME Group: 2. Jet Fuel Price Monitor 3. Oil Price 4. A proxy for risk-free rate such as 3-month treasury bill can be found here: 5. S&P 500 index historical performance Marking Rubric (15 marks) Not yet competent Competent Sophisticated Trading objective is clearly identified (2 marks) -Issue/problem to be considered critically is stated clearly and described comprehensively, delivering all relevant information necessary for full understanding 0-0.5 0.5-1.5 1.5-2 Trading strategy is clearly outlined (3 marks) - Transactions are clearly planned to achieve the objectives - Explain what products were sold or bought, demonstrating the understanding of how future works - Clearly identify the differences between hedging and speculating 0-1 1-2 2-3 All transactions/deals are clearly recorded, reported and explained (4 marks) - The reasons for transactions are well explained. - Transaction and position records are well presented in excel and appendix 0-1.5 1.5-3 3-4 Performance is clearly analyzed (5) - Profit and loss are clearly reported and concluded - Key learnings are reflected 0-1.5 1.5-3 3-5 Format and Information source (1) - Proper authentic professional information sources are sufficient to develop a comprehensive analysis and synthesis. - Appropriate & consistent in-text citation. All references formatted consistently and appropriately. - Format guideline outlined in the instruction is followed - Figures/tables are clearly labelled; - Word count is within the limit; 0-0.2 0.2-0.5 0.5-1