Introduction to Derivative Securities
Introduction to Derivative Securities
Assessment 2: Case Study 2023
Due date 21st May 8pm WST
Worth 35% of your final grade.
Submission requirements:
This is an individual assessment. All submissions must have your name and student ID on the front page. Submission is via the turnitin link on Blackboard. Due to academic integrity concerns all submissions must be typed up in word or pdf format. Formulas and calculations presented must use an equation editor (or equivalent).
Formatting:
Times New Roman 12 font, 1.5 spacing. Maximum 5 pages excluding graphs, diagrams and references.
Late Penalties:
Standard late penalties apply if not uploaded by the due date unless alternative arrangements are in place. If an extension is required, then it is highly preferrable that an application is received before the due date with supporting documentation.
Referencing and Academic Integrity:
You must reference all your sources accordingly. Accompanying diagrams or charts (if used) must also be labelled and referenced with date accessed.
Students are reminded of their obligations regarding academic integrity at Curtin University and that their submissions are expected to be their own work. if you are unsure of your responsibilities then please check the relevant section of the Curtin website: http://academicintegrity.curtin.edu.au/Overview:
This assessment will test your understanding of derivatives in both financial market and theoretical settings. It will allow you to develop a further understanding into the various relationships that different financial instruments play in financial markets as well as give you some insight and understanding into events that have recently occurred or are currently impacting the global derivatives market.
In order to successfully complete this assessment, you are expected to utilise the concepts and theories studied in class as well as do your own external research to be able to answer these questions.
Learning outcomes associated with assignment:
1 Construct derivatives theory from abstract theoretical concepts
2 Adapt derivatives theory to market practice
3 Evaluate the financial economic implications of financial engineering methods
4 Analyse and communicate financial derivatives pricing and risk management ideas in a clear and succinct manner
Additional Resources and starting points to assist:
Bank for International Settlements: https://www.bis.org/Australian Securities Exchange: www.asx.com.auReserve Bank of Australia: www.rba.gov.auYahoo Finance: www.finance.yahoo.com/Assignment total 35 marks
Formatting and referencing 2 marks
LIBOR London Interbank Offered Rate
19 marks
In 2023 it is expected/hoped that the London Interbank Offered Rate (LIBOR) will be phased out of use as a benchmark rate in financial markets and by different financial market regulators around the world. This is despite its historical use of for over 30 years.
The following questions require you to undertake research into this historical event and answer the following questions.
Considering what benchmark rates are used for in financial markets, what are the features that a good benchmark rate should have and why? [3 marks]
Discuss and explain some of the reasons that might have contributed to moving away from LIBOR. [4 marks]
Analyse why the phasing out of LIBOR of use as a benchmark rate might be an issue for financial markets and in particular derivative markets as a whole. What are some of the key challenges that need to be addressed? [4 marks]
Investigate what has been proposed or implemented as replacement benchmarks for LIBOR around the world. Why have these been proposed as alternatives and are there differences in strategy? Are there any concerns with utilising any of the proposed alternatives when it comes to any derivative instruments? Are there any advantages that potentially may have come about because of the proposed move away from LIBOR? [8 marks]
Spots and Futures
14 marks
In April 2020 an unusual and historical event occurred in a particular commodity linked derivatives market. The following questions require to you undertake research into the relationship between an underlying asset and futures contracts and focuses on futures commodity markets.
All the following are related in some way to Crude oil. Define each and discuss what might some of their potential differences be.
Crude oil Spot price
Crude oil futures contract, May Expiry
Crude oil futures contract, June Expiry
Crude oil futures option price
[4 marks]
Figure 1 below depicts the Spot Price of West Texas Intermediate (WTI) Crude Oil. What is so unusual about the price from 20th April 2020 onwards? Explain your reasoning as to why this might have occurred and why there is such a sharp recovery. [3 marks]
figure 1: WTC- | Crude Oil West Texas Intermediate WTI Cushing US FOB - data Source: Thomson Reuters.
A futures contract is a contract written on an underlying asset, explain the impact that the 20th of April in figure 1 above above would have on futures contracts that utilise WTI crude oil as an underlying asset. Was the impact the same on all futures contracts written on WTI crude for the year 2020 and if not, why? [4 marks]
Brent Crude Oil is often compared to WTI Crude Oil. Explain the differences between the two and why they are not the same as an underlying asset despite both being Crude Oils. What was the spot price of Brent Crude on the 20th of April 2020 and analyse if it depicted the same unusual behaviour as WTI Crude Oil? [3 marks]
