Angelica Lopez- 400002613

Derivatives
March 10th, 2020

Bearish Conditions Prevail

The stock market has seen significant downfalls throughout this week as

bearish conditions weather the economy. Concerns about the Coronavirus caused major

benchmarks to fall in the negative territory. In response to the pandemic’s impact on the

economy, the Fed did an emergency rate cut of 50 basis point to 1-.25%. Throughout the

week, Thursday ( March 5th) experienced the most volatility as the death toll in the US rose

and investors grew in fear. In fact, many areas went under quarantine which had a significant

impact on the airlines and cruise liners. For this week’s trades, future contracts were used to

increase the percent of commodities and Non-US currencies by 3% of the total portfolio

value ( Total portfolio value: 936, 859,330.23, 3% of portfolio: $9,028,945.00). To diversify

my portfolio, European Currencies, Cocoa and Gold future contracts were purchased.

Essentially, I will be able to purchase the European currencies, cocoa, and gold at the set

price, regardless of the current market price at the expiration date. These trades were made

since currencies would be able to provide an effective hedge as the pandemic disrupts

activity, trade, and value chains. Furthermore, gold is considered a solid hedge against risk-

off episodes; In other words, gold has the highest negative correlation with risk assets and

US yields. In the course of purchasing these contracts, I learnt that future contracts are one of

the most common derivatives used. By buying future contracts, I lock in a price which

reduces my risk in today’s volatile market conditions. Surely then, a key advantage of

participating in a futures contract is that it removes uncertainty about the future price of an

item. I also learnt about some key features of future contracts such as Contract Size, Margin,

Termination of trading, and Trading hours. U.S Treasury bonds, known as T-Bonds, were

also traded. This is considered one the safest investment; still, they are not without risks. In
this trade, I learnt that if interest rate rise after the T-Bond is purchased, the price of the bond

fall, which is known as the interest rate risk. In this case, I bought T-bond futures to increase

interest rate risk. Central banks often change their target interest rates in response to

economic activity: raising rates when the economy is overly strong, and lowering rates when

the economy is sluggish. Since the economy is sluggish, interest rates are expected to fall.

Overall, my portfolio return for this week was -6.31% with a value of

$936,859.330.23. Evidently, my portfolio reflects the bearish conditions of the market.

Amidst all the new terms and concepts I was introduced to this week, the most valuable

lesson is that a pandemic can have grave consequences on the stock market; nonetheless,

future contracts can be used to hedge risks as it removes the uncertainty of the future price of

an item; moreover, T-bond future contracts can also be instrumental in increasing or

decreasing risks. A prudent investor must study the market carefully and engage trades that

would maximize their return in spite of the current economic turmoil.