1.

What are the difference between Crude oil (commodity) spot price, Crude oil
company stock price, Crude oil futures price (different month), Crude oil futures
option price? (1 mark)
The spot price of a commodity is the local cash price for immediate delivery of the commodity
Crude Oil Future Price means the price that buyers are willing to pay for crude oil on a future
delivery date. The basic difference between spot price and future price is that future price is the
price in the future whereas spot price is the current market price for oil. However, Future Price is
NOT a guarantee since the actual price in the future would depend on a number of factors.
Crude oil future option price are the prices of option contracts with crude oil futures as an
underlying asset.
Crude Oil Company stock pricehe price of the stock of the company that is involved in oil processes
(exploration, extraction, refining, transporting, etc.).

2. Please find a similar graph online, copy and paste in your essay to verify the graph
below, then give a brief introduction of the negative WTI Crude Oil Spot Price on
20th April 2020. (1 mark)

Source: https://ycharts.com/indicators/wti_crude_oil_spot_price
 3. On the same day, the WTI crude futures contract, linked tightly to the physical oil
market. The Crude Oil Front Month Futures (CLc1) which expires in May closed
at -$37.63/bbl. Please find a graph online showing the above fact. (1 mark)

Source: https://www.cnbc.com/quotes/@CL.1

4. We know that the nearby contract turned negative, what about the deferred month
futures, e.g., the June contract? Was it also negative or it was still trading at a
positive price, please explain? Please also show me the graph. (1 mark)

Yes, The prices for subsequent future contracts was affected but did not reach the negative zone.
The prices for Jun-WTI contract fell by 18% to $20.43 per barrel and Jul-Future fell by 11% to
$26.18 per barrel. The underlying reason is fairly simple, as all contracts were based on the sport
prices of Crude oil which was significantly impacted due to Covid-19. The transition to negative
prices reverted within the next few days.
The below graph shows the behavior of Jun Future contract:

Source: https://www.barchart.com/futures/quotes/CLM20
5. If futures price turns negative, will future option price also goes to negative? Or
option strike price will be adjusted to a negative value, but futures option premium
is still positive? Please answer this question based on the table. (1 mark)
The prices of options move in correlation to the prices of futures. However, the accompanying
premium can never be negative. The table indicates that the strike price, at which the option can be
exercised, is negative which is in line with the trend of future contract prices of crude oil around the
same date. However, the distinctive feature of option is that, if the option becomes “Out of the
money”, the holder is not obligated to exercise it, the option can just expire without any further
loss.

6. The Black-Scholes option pricing formula requires the underlying price to stay
positive. Then, Black-Scholes cannot be used to price the Crude oil futures option
when Crude oil futures price go negative. How did SEC solve the option pricing
problem allowing negative underlying price? (Hint: exchange employed Bachelier
model. You will be awarded a full mark by copying and paste the information from
the website and provide in-text citations with references. We will get back to this
piece of knowledge after we learn option pricing in week 7 and week 8.) (1 mark)

The Bachelier model is a mathematical pricing model considered to be particularly useful in pricing
options when the value of the underlying becomes or may become negative. It is an alternative to
the Black-Merton-Scholes and other option pricing models and is attractive because it does not rely
on logarithms which cannot represent negative values. Bachelier assigns higher values to out-of-
the-money puts than Black-Scholes, while out-of-the-money calls are priced lower. As prices move
closer to zero, the differences between the models become more pronounced (Schachermayer,
2008).

Schachermayer, W., & Teichmann, J. (2008). How close are the option pricing formulas of Bachelier and
Black–Merton–Scholes?. Mathematical Finance: An International Journal of Mathematics,
Statistics and Financial Economics, 18(1), 155-170.

7. a. Does Covid-19 relate to Oil price? (1 mark)

Yes. Covid-19 resulted in full shutdown of businesses and reduced economic activity. This resulted in reduced
transports, lower utilization of oils in the industries etc., resulting in overall lower demand which directly
affects the price.
b. What are the choices of futures buyer near the last trading day in delivery
month? What does it mean that futures seller market corner the futures buyer?
(1 mark)
Future buyer can either settle in cash or can accept the agreed product on the delivery date on the decided
price.
c. Can oil producer reduce their production or even close the well and reopen it later? (1 mark)
Temporary shutting of wells is normally avoided by companies because of the fact that restarting
production is extremely expensive and cannot gaurentee return flow rate. Engineers consider
burning of excess oil as a better alternative. 3 main consequences are as follows:
1. Reopening of wells may never result in returning to previous production rate.
2. equipment for pumping is repaired at a very high cost.
3. Refinaries and pipelines cannot continue to be operational without minimal production level.
d. 1933 Wisconsin milk strike, resulting in the dumping of the milk. What are the difference
between Crude oil and milk? (1 mark)
There is a considerable difference. Crude Oil dumping may have consequences rather than milk, as
milk can be consumed by other creatures. As milk is based on Water, it poses no risk to area or
creatures around. Crude Oil on the other hand, may contribute to a source pollution if dumped
without caution, damaging the flora and fauna.
e. Who is going to pay for the delivery cost? Who is going to pay for the storage cost after the
delivery? How does it affect WTI oil futures price and spot price? (2 mark)
When delivery takes place, a warrant or bearer receipt—which represents a specified quantity and
quality of a commodity in a specific location—changes hands from the seller to the buyer. Full value
payment then occurs. The buyer has the right to remove the commodity from the warehouse. Often,
a purchaser will leave the product at the storage location and pay a periodic storage fee. Exchanges
also set fees for many aspects of the delivery process.

8. How was Brent oil price? Was it also negative? Where is the Brent oil market based
around? (1 mark)
The impact of WTI crude oil price impacted the price of Brent Oil. Around the period of Apr-20,
Brent Oil prices dropped to $9.12 per barrel falling down from year starting price of $70 per barrel.
Brent Oil comes from the Northern seas and is regarded as an ideal alternative toWTI and is
considered a benchmark for European and African regions.
9. When it rebounds which of the prices are going to rebound quicker, Crude barrel price,
futures, options, price at petrol pump? (1 mark)
In case of rebound, Crude Barrel Price will change, which will result in changed future price,
followed by option prices. Prices at petrol pump would come last.
10. Does a negative Crude oil price mean that filling the car will suddenly get cheaper? How
does the negative WTI oil price impact on the Gasoline index (CTXBTR) and Futures (RBc1)?
Explain. (1 mark)
Crude Oil Prices drive almost half of the gasoline prices. It can be assumed that filling a car will
become cheaper as prices of gas in United States were jolted by the oil crash and fell to $1.81, with a
$1.03 drop as compared to previous year. Since, the prices of Gasoline and Futures RBc1 are
impacted by changes in crude oil prices per barrel, Gasoline Index and Futures will indeed be
affected with a direct correlation, however, strength of relationship may vary.