Commodities Investing: Key Practice Questions for Traders

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York University *

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3FH3

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Finance

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Feb 20, 2024

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2/9/24, 6:13 PM Commodities Investing - Practice Questions - COMMERCE 3FH3:Alternative Investments and Portfolio Management https://avenue.cllmcmaster.ca/d2l/le/content/598526/viewContent/4506089/View 1/2 You are provided the following common assumptions. Note that the scenarios below are independent of each other. Your trading account has $800,000 of cash on Jan 15, 2018, before you begin trading on the same date. The next trading dates are July 15, 2018, and Jan 15, 2019, with a simplifying assumption that there is no margin recalculation in between these dates. You want to trade WTI Crude Oil futures contracts where each contract provides exposure to 1,000 barrels of crude oil. Your broker’s margin requirement is the initial margin of $7,315 per contract and the maintenance margin of $4,325 per contract. The broker charges a trading commission of $1.05 per contract, including all brokerage and exchange fees. There are no commission charges. The broker also charges a 2.5% annual interest on all loans and credits interest at 0.6% on all cash balances. --------------------------------- Use the following information in addition to the common assumptions above for questions 1 to 3. On Jan 15, 2018, you take a LONG position in 100 futures contracts settling in July 2018 for $92.90 per barrel. The spot price of the underlying is $97 per barrel, and you expect this price to hold steady for the next six months. 1 . How much remaining cash would you have after buying the contract, and what is your notional profit or loss after closing the contract in 6 months when the spot price happens to be $91. 2 . Calculate the amount you need to deposit, if any, in case of a margin call immediately before settlement in July when the spot price is $91 per barrel. 3 . What is the annualized return on the balance in your account after the contract is closed? --------------------------------- Use the following information in addition to the common assumptions above for questions 4 and 5. On Jan 15, 2018, you take a SHORT position in 50 futures contracts settling in July 2018 for $90.00 per barrel. On the same date, you also take a LONG position in 50 futures contracts settling in Jan 2019 for $92.00 per barrel. The spot price of the underlying is $97, and you expect it to hold steady for the next one year. On Jul 15, 2018, you close out both positions when the Jul 2018 contract is trading at the then-spot price of $97.00 per barrel and the Jan 2019 contract is trading at $94.00 per barrel. Still, on Jul 15, 2018, you take a SHORT position in 50 Jan 2018 contracts trading at $89.00 per barrel and a LONG position in 50 Jul 2018 contracts trading at $95.00 per barrel.

2/9/24, 6:13 PM Commodities Investing - Practice Questions - COMMERCE 3FH3:Alternative Investments and Portfolio Management https://avenue.cllmcmaster.ca/d2l/le/content/598526/viewContent/4506089/View 2/2 Finally, you close out the two positions on Jan 15, 2019, when the Jan 2019 contract is trading at the then-spot price of $97.00 per barrel and the Jul 2019 contract is trading at $94.00 per barrel. 4 . How much remaining cash would you have after your trades on Jan 15, 2018? 5 . Calculate your annualized rate of return based on the trading completed in your account. ................................................................................. Use the following information in addition to the common assumptions above for questions 6 and 7. On Jan 15, 2018, you take a SHORT position in 50 futures contracts settling in July 2018 for $94.00 per barrel. On the same date, you also take a LONG position in 50 futures contracts settling in Jan 2019 for $90.00 per barrel. The spot price of the underlying is $97.00 per barrel, and you expect it to hold steady for the next one year. On Jul 15, 2018, you close out both positions when the Jul 2018 contract is trading at the then-spot price of $90.00 per barrel, and the Jan 2019 contract is trading at $87.00 per barrel. Still, on Jul 15, 2018, you take a SHORT position in 50 Jan 2019 contracts trading at $87.00 per barrel and a LONG position in 50 Jul 2019 contracts trading at $83.00 per barrel. Finally, you close out the two positions on Jan 15, 2019, when the Jan 2019 contract is trading at the then-spot price of $83.00 per barrel and the Jul 2019 contract is trading at $80.00 per barrel. 6 . Calculate the ending equity balance in your account based on the trading completed in your account. 7 . Calculate your annualized rate of return based on the trading completed in your account.

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