FRM part I – FMP&VL amiCoach

FORWARD: PRICING
VALUE OF FORWARD
1. In our 3-month zero-coupon bond contract, we
determined that the no arbitrage forward price was
$507.34. Suppose that after two months the spot price
on the zero-coupon bond is $515, and the risk-free rate
is still 6%. Calculate the value of the long and short
positions in the forward contract?

PRICE AND VALUE OF FORWARD WITH COST AND

BENEFIT
2. Calculate the no-arbitrage forward price for a 100-day
forward on a stock that is currently priced at $30.00 and
is expected to pay a dividend of $0.20 in 10 days, $0.30
in 80 days, and $0.40 in 120 days. The annual risk-free
rate is 5%, and the yield curve is flat.

3. After 60 days, the value of the stock in the previous

example is $36.00. Calculate the value of the equity
forward contract on the stock to the long position,
assuming the risk-free rate is still 5% and the yield curve
is flat.

CONTINUOUS
4. Calculating the price of a forward contract on an
equity index
The value of the S&P 500 index is 1,140. The
continuously compounded risk-free rate is 4.6% and the
continuous dividend yield is 2.1 %. Calculate the no-
arbitrage price of a 140-day forward contract on the
index.

5. Calculating the value of a forward contract on an

equity index
After 95 days, the value of the index in the previous
example is 1,025. Calculate the value to the long
position of the forward contract on the index, assuming
the continuously compounded risk-free rate is 4.6% and
the continuous dividend yield is 2.1%.

FMP - in-class Example page 1

FRM part I – FMP&VL amiCoach

FORWARD ON CURRENCY
6. Calculating the price of a currency forward contract.
The risk-free rates are 6% in the United States and 8% in
Mexico. The current spot exchange rate is $0.0845 per
Mexican peso (MXN). Calculate the forward exchange
rate for a 180-day forward contract.

7. Calculate the value of the forward contract in the

previous example if, after 15 days, the spot rate is
$0.0980 per MXN.

FRA

8. Calculating the price of an FRA

Calculate the price of a 1 x 4 FRA (i.e., a 90-day loan, 30
days from now) . The current 30-day LIBOR is 4% and the
120-day LIBOR is 5%.

9. Continuing the prior example for a 1 x 4 FRA, assume

a notional principal of $1 million and that, at contract
expiration, the 90-day rate has increased to 6%, which is
above the contract rate of 5.32%. Calculate the value of
the FRA at maturity, which is equal to the cash payment
at settlement.

10. Value a 5.32% 1 x 4 FRA with a principal amount of

$1 million 10 days after initiation if 110-day LIBOR is
5.9% and 20-day LIBOR is 5.7%.

FMP - in-class Example page 2

FRM part I – FMP&VL amiCoach

FUTURES: BASIC

A. STANDARDIZATION

A.1 Underlying asset

 Agricultural  Metals  FX

 Energy  Options  Interest Rates

 Real Estate  Weather  Equity Index

A.2 Code

Most Futures contracts codes are five characters. XX X XX. The first two characters identify the [contract type], the
third character identifies [the month] and the last two characters identify [the year]. January = F; February = G;
March = H; April = J; May = K; June = M; July = N; August = Q; September = U; October = V; November = X; December
= Z.

Example: CLX18 is a Crude Oil (CL), November (X) 2018 contract.

A.3 Contract Size

 Crude oil (CL): 1,000 barrels ~ 42,000 gallons  Gold (GC): 100 ounces

 Wheat (ZW), Corn (ZC): 5,000 bushels1  Silver (SI): 5,000 ounces

A.4 Delivery date

Contract Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Wheat 14 14 13 14 14
Dec Mar May July Sep

A.5 Delivery location

1
1 gallon = 3.785 (4) liters; 1 bushel corn (56#) = 25.40 (25) kilograms; 1 bushel wheat/soybeans (60#) = 27.22 (27) kilograms

FMP - in-class Example page 3

FRM part I – FMP&VL amiCoach

B. MARGINS

At June 29, I purchased 02 December futures contracts. Each contract size is 5.000 ounces of silver. IM = $6,000,
MM = $4,500. (assume IM and MM for 02 contracts)
01 contract size:
My position:

FMP - in-class Example page 4

FRM part I – FMP&VL amiCoach

C. DELIVERY PROCEDURES

- Investor A: short-side, and have the right to decide to deliver or not.

- When investor A decides to deliver  investor A’s broker issues a notice of intention to deliver to the clearing
house. (This notice states how many contracts will be delivered and, in the case of commodities, also specifies
where delivery will be made and what grade will be delivered.)

- Clearing house chooses a party with a long position to accept delivery. Parties with long positions must accept
delivery notices. (The usual rule chosen by the exchange is to pass the notice of intention to deliver on to the
party with the oldest outstanding long position)

- The first notice day is the first day on which a notice of intention to make delivery can be submitted to the
exchange. The last notice day is the last such day. The last trading day is generally a few days before the last
notice day. To avoid the risk of having to take delivery, an investor with a long position should close out his or
her contracts prior to the first notice day.

FUTURES: COMMODITY

LEASE RATES
1. Calculate 12-month forward price for a bushel of
corn that has S0 = $5 and annual lease rate 7%,
Continuous Rf = 9%

STORAGE COSTS
2. Calculate 03-month forward price for a bushel of
soybeans if S0 = $3, r = 1%/month, monthly storage
costs = $0.04/bushel/month

3. S0 = $2.25, r = 5.5%/year, storage cost = 2%/month.

Calculate 6-month forward price

CONVENIENCE YIELD
4. S0 = $100, F = $106.1837, r = 10%. Calculate implied
convenience yield? T = 1 year.

CRACK SPREAD
5. We plan on buying crude oil in one month to
produce gasoline and heating oil for sale in two
months.
The 1-month futures price for crude oil is $30/barrel.
The 2-month futures price for gasoline and heating oil
are $41 and $31.5/barrel.
Calculate the 5-3-2 crack spread.

FMP - in-class Example page 5

FRM part I – FMP&VL amiCoach

SPECIAL CASES: T-BILL FUTURES

CTD BOND

FMP - in-class Example page 6

FRM part I – Reference: Open interest

Open interest, the total number of open contracts on a security, applies primarily to the futures
market. Open interest is a concept all futures traders should understand, because it is often used to
confirm trends and trend reversals for futures and options contracts. Although this number often gets
lost as traders focus on bid price, ask price, volume and implied volatility, paying attention to open
interest can help options traders make better trades. Here we take a look at what information open
interest holds for a trader and how traders can use that information to their advantage.

Tutorial: Futures Trading 101

What Open Interest Tells Us

A contract has both a buyer and a seller, so the two market players combine to make one contract.
The open interest position that is reported each day represents the increase or decrease in the
number of contracts for that day, and it is shown as a positive or negative number. An increase in
open interest along with an increase in price is said to confirm an upward trend. Similarly, an
increase in open interest along with a decrease in price confirms a downward trend. An increase or
decrease in prices while open interest remains flat or declining may indicate a possible
trend reversal.

8 Rules of Open Interest

There are certain rules to open interest that futures traders must understand and remember. They
have been written in many different publications, so here I have included an excellent version of
these rules written by chartist Martin Pring in his book "Martin Pring on Market Momentum":

1. If prices are rising and open interest is increasing at a rate faster than its five-year seasonal
average, this is a bullish sign. More participants are entering the market, involving additional buying,
and any purchases are generally aggressive in nature.

2. If the open interest numbers flatten following a rising trend in both price and open interest, take
this as a warning sign of an impending top.

3. High open interest at market tops is a bearish signal if the price drop is sudden, since this will
force many weak longs to liquidate. Occasionally, such conditions set off a self-feeding, downward
spiral.

4. An unusually high or record open interest in a bull market is a danger signal. When a rising trend
of open interest begins to reverse, expect a bear trend to get underway.

5. A breakout from a trading range will be much stronger if open interest rises during the
consolidation. This is because many traders will be caught on the wrong side of the market when the
breakout finally takes place. When the price moves out of the trading range, these traders are forced
to abandon their positions. It is possible to take this rule one step further and say the greater the rise
in open interest during the consolidation, the greater the potential for the subsequent move.

6. Rising prices and a decline in open interest at a rate greater than the seasonal norm is bearish.
This market condition develops because short covering, not fundamental demand, is fueling the
rising price trend. In these circumstances money is flowing out of the market. Consequently, when
the short covering has run its course, prices will decline.

7. If prices are declining and the open interest rises more than the seasonal average, this indicates
that new short positions are being opened. As long as this process continues it is a bearish factor,
but once the shorts begin to cover, it turns bullish.

FMP - in-class Example page 7

FRM part I – Reference: Open interest

8. A decline in both price and open interest indicates liquidation by discouraged traders with long
positions. As long as this trend continues, it is a bearish sign. Once open interest stabilizes at a low
level, the liquidation is over and prices are then in a position to rally again.

Figure 1: 2002 chart of the COMEX Gold Continuous Pit Contract

Source: TradeStation

For example, in the 2002 chart of the COMEX Gold Continuous Pit Contract, shown above, the price
is rising, the open interest is falling off and the volume is diminishing. As a rule of thumb, this
scenario results in a weak market.

If prices are rising and the volume and open interest are both up, the market is decidedly strong. If
the prices are rising and the volume and open interest are both down, the market is weakening. If,
however, prices are declining and the volume and open interest are up, the market is weak; when
prices are declining and the volume and open interest are down, the market is gaining strength.

The Bottom Line

Open interest can help futures traders get a sense of whether the market is gaining strength or
getting weaker. When analyzing futures, avoid the common mistake of failing to take this number
into account. As an investor, the more you know, the less likely you are to be caught off guard in a
losing trade. Remember, it's your money, so invest it wisely.

Read more: Intro To Open Interest In The Futures

Market http://www.investopedia.com/articles/technical/02/110602.asp#ixzz4puf7gUyW
Follow us: Investopedia on Facebook

FMP - in-class Example page 8

Lesson: Introduction to Option

1. Forward vs. Option obligation vs. right

2. Option positions long vs. short

3. Option types call vs. put

4. Getting familiar to option positions Long call

Short call

Long put

Short put

5. Option premiums European vs. American option

6. Pay-offs; Example:
Long Call, exercise price X = 100, option premium c0 = 10
Profit; a) Fill the table below:
ST EXERCISE OR NOT? PAY-OFF PROFIT

95

100

105

110

115
b) Create a graph for ST and profit

7. Moneyness;
Example: We intend to open a long call option with option premium c0 = $10,
exercise price X = $100. Option will expire after 90 days.

FMP - in-class Example page 9

Intrinsic value; a) at maturity (time T=90), spot price of underlying asset ST = 150. Calculate
pay-off and profit that we receive from short-side.
Time value;

b) Imagine at t (before maturity) with spot price as below. Name the

moneyness and calculate intrinsic value?

Moneyness Intrinsic value

After 1 day (t = 1), S1 = 120

After 2 days (t = 2), S2 = 100

After 3 days (t = 3), S3 = 80

c) At t = 3, intrinsic value = 0, but we observed that market price of this option

(ct) is $15. How can this happen? Calculate Time value of (t = 3).

8. Formula summary
LONG CALL SHORT CALL LONG PUT SHORT PUT
pay-off

intrinsic
value
profit

moneyness

1. where is premiums?

2. where is X?

3. where is BE?

4. slope of upward line?

5. limited/unlimited G/L?

FMP - in-class Example page 10

Lesson: Properties of stock option

1. Put-call parity (for European)

Formula

Components

Prove?

Example Example: A put option is now selling in the market with premium p0 = 2, exercise

price X = 100, maturity T = 1 year, spot price S0 = 105, risk free rate rf = 10%.

According to put-call parity, what is the premium of call option with same

underlying asset, same maturity)?

How to remember the formula?

2. Put-call-forward parity

Formula

3. American call and put relationships

(kind of American “put-call parity”)

4. Lower bound and Upper bound

Formula

Example

5. Formula with dividends

FMP - in-class Example page 11

FMP - in-class Example page 12
6. Option strategies

Bull call Bull put

Bear call Bear put

Box Butterfly

Long straddle Short straddle

Strips Straps

Long strangle Short strangle

FMP - in-class Example page 13

Example 1:
Long call X1 = 40, c1 = 3; Short call X2 = 50; c2 = 1
a) At maturity, ST = 45. Calculate profit of this strategy?
b) Maximum gain
c) Maximum loss
d) At which ST = ? should the strategy is breakeven?

Example 2:
Long call, X = 45, c = 3; Long put, X = 45, p = 2
a) At T, ST = 35. Compute profit of the strategy?
b) At which ST the loss is maximum?
c) At which ST the profit is maximum?
d) When do we use this strategy? (expect higher/lower
volatility)

Example 3:
Long call, X1 = 50, c = 1.5; Long put, X2 = 45, p = 2
a) At T, ST = 40. Compute profit of the strategy?
b) At which ST the loss is maximum?

FMP - in-class Example page 14

Lesson: OPTION PRICING
I. Pricing an option using binomial model

Example 1: Riskless portfolio method

Call option (X=47.5, S0= 50, T=1)
Up factor (U) = 2
Down factor (D) = 1/2
rf = 10%

a. Draw binomial tree of stock in 01 year

b. Construct a portfolio with: Long 01 call option and

Short n shares, assume n=0.7.
Option pricing: Calculate c0?

c. Formula of n?

Example 2: using probability (01 period)

Call option (X=47.5, S0= 50, T=1)
Up factor (U) = 2
Down factor (D) = 1/2
rf = 10%

a. Assume probability of up-move (πu = 40%): Calculate

c0 ?

b. Formula of πu?

c. Is πu an actual probability?

Example 3: Practice pricing option

Put option(X= 47.5, T=1, S0= 50), rf=10%,
U= 2, D=0.5.

a. Calculate p0? (using compounding method)

b. Calculate p0? (using continuous method)

(Answer: 12.27)

Example 4: EUROPEAN OPTION PRICING (02 periods)

European call option( X=45, S0= 50), U= 1.25, D=1/1.25,
RFR=7%/period, T=2 years, 02 steps

FMP - in-class Example page 15

Example 5: AMERICAN OPTION PRICING (02 periods)
American call option( X=45, S0= 50), U= 1.25, D=1/1.25,
RFR=7%/period, T=2 years, 02 steps

Example 6: HOW TO CALCULATE U AND D FROM σ American put option, S = 50, X = 52, RFR = 5%,
Proof: Life of option is 02 years, there are 02 time steps,
Volatility of underlying asset price is 30%.
Calculate of up-move probability?

Example 7:
SOME OTHER FORMULA OF UP-MOVE PROBABILITY
(i) for compounding

(ii) for continuous

(iii) with dividend

(iv) for currency option

FMP - in-class Example page 16

 Calculate probability of up-move?

(v) for option on futures

Calculate probability of up-move?

Example 8. EUROPEAN CALL OPTION ON A COUPON

BOND (with interest rate binomial tree)
Underlying asset: 3-y bond, $100 par, annually
coupon = 7%/year
Call option (X = $100, T = 2 years)
Assumption probability of up-move and down-move is
50% each

r0 = 3%;
ru = 7%; rd = 4%
ruu = 8%; rdd = 5%; rud = 6%

FMP - in-class Example page 17

II. Pricing an option using BSM MODEL

FMP - in-class Example page 18

FMP - in-class Example page 19
Example 1:

a) d1 = ? d2 = ? b) Pricing call option on that stock? c) Pricing put option on that stock?

EARLY EXERCISE FOR AMERICAN CALL

…with no dividends: American call should never be early
exercised
…with dividends: American call can only be optimal to
exercise at a time before the stock goes ex-dividend

Early exercise for American put:

always early exercise when deep ITM

FMP - in-class Example page 20

Lesson: THE GREEKS

1. Factors affect the option price

2. Prior to expiration curve:

For reference:

FMP - in-class Example page 21

3. Calculating portfolio delta
Example 1:
Assumption: 01 call option contract has 01 underlying asset
delta call = 0.6; delta put = -0.4
Position of port. Delta of port.

Long 01 call 0.6

Long 1,000 calls 0.6*1000

Long 01 stock 1

Long 1,000 stocks 1000

Long 01 put -0.4

Short 50 puts 0.4*50

Long 1,000 calls + Short 600 + 400 + 10

1,000 puts + Long 10 stocks

4. Hedging
Example 1: delta port = 600 –n*0.6 =0
I have 600 shares. How many call option should I short in order to  n = 1000
hedge the position? Assume delta of each call = 0.6  I will short 1000 call options

Example 2:
Delta of each put = -0.5. How many put options should be used to
hedge 1000 shares?

Example 3:
My portfolio currently has delta = 0, but gamma = -6000
How can we use call option (which has delta = 0.6, gamma = 1.25) to
execute Delta-Gamma hedging this position?

FMP - in-class Example page 22

Lesson: Nonstandard options

I was traded in exchange but can be customized

I was born in Thursday and live for a week

I can be exercised on the last day of each month. I am not

European and American neither.

I will start sometime in the future, not now.

My underlying asset is an option.

I am not a call, nor a put. I will choose it later.

Call option A: If the price goes up to $100, I will be effective.

Call option B: If the price goes up to $100, I will be expired.

I am the combination of Call option A and Call option B.

I will receive a fixed dollar amount, or I will receive nothing

My payoff is Max(0, ST - Smin)

My payoff is X- ST, which ST = Smin

At T, I can receive usual payoff or intrinsic value at the

“shout day”

I use average underlying price for my payoff formula

If exercise, I exchange AUD for MXN, but I am not currency

option

My underlying asset is a basket of securities

My long position may have a negative payoff

FMP - in-class Example page 23

FRM Part I – SWAP amiCoach

SWAP

1. VALUING I/R SWAP

Eg.1a.

Eg.1b.

Eg.2. VALUING CURRENCY SWAP

FMP - in-class Example page 24

FRM Part I – SWAP amiCoach

3. Comparative advantages

Fixed Floating
A 10% LB + 1%
B 15% LB + 2%

A has ABSOLUTE ADVANTAGE in borrowing in ____________________

A has COMPARATIVE ADVANTAGE in borrowing in ________________

B has COMPARATIVE ADVANTAGE in borrowing in ________________

a. Total saving? Each saving?

b. How to pricing a swap?

Eg. 3b.

FMP - in-class Example page 25

 Optimal Hedge Ratio

In hedging, you can hedge your whole portfolio or some portion of it. The hedge ratio is
the size of the futures contract relative to the cash transaction. In a previous example involving a
trader with oil en route from the Gulf, the hedge ratio was one, since she sold a futures contract
representing each barrel of oil. When using turnips to hedge, the ratio was still 1, since the value
of the crude was hedged with an equal value of turnips. If the hedger had sold _ barrel for each
barrel in transit, the hedge ratio would have been _. It turns out that it is not always optimal to
hedge your whole product and Hull (2000) works out what the optimal hedge ratio is to minimize
risk. In his exposition, he defines

ΔS = ST - St = the change in the spot price over the life of the contract,

ΔF = FT - Ft = the change in the futures price over the life of the contract,

σS = the standard deviation of ΔS,

σF = the standard deviation of ΔF,

ρ = σSF/(σSσF) = the correlation coefficient between ΔS and ΔF, which is the covariance
of ΔS and ΔF divided by the standard deviations of ΔS and ΔF, and

h = the hedge ratio.

If the hedger owns the products and sells the future, his portfolio value is (S - hF). The change in
value of the portfolio is
ΔS - hΔF.

Alternatively, if the hedger buys the future and is short the product, his portfolio value is hF - S.
The change in value of the portfolio is
hΔF - ΔS.

The variance (σ2) for the above two portfolios is

2 2 2 2
σ2 = σ + h2σ - 2hσSF = σ + h2σ - 2hρσSσF.
S F S F

To find the optimal hedge ratio, which minimizes risk or variance, minimize the above expression
with respect to h.

2
∂σ2/∂h = 2hσ - 2ρσSσF = 0.
F

Checking second order conditions

2
∂2σ2/∂h2 = 2σ > 0.
F

So h is a minimum. Solving for h, we get

h = ρσS/σF.

FMP - in-class Example page 26

Now if S and F are for the same products it is likely that σS and σF are close to the same value and
ρ is close to 1. Then the optimal hedge ratio is near 1. Where this becomes more interesting is
where you are hedging one product with a different products future contract. For example, you
might use Henry Hub gas to hedge for gas at Waha or some other hub. Then σS and σF may not
be close to the same and ρ may not be close to 1. The closer ρ is to one, and the larger is the
variance of the product you are hedging, the more you hedge. The larger is the variance of the
product used to hedge the lower the hedge ratio. It is even possible that h would be greater than
1.

FMP - in-class Example page 27

5.2 Arguments of hedging
A. Unprofitable…
SHORT OIL FUTURES

President: This is terrible. We've lost $10 million

in the futures market in the space of three
months. How could it happen? I want a full
explanation.

Treasurer: The purpose of the futures contracts

was to hedge our exposure to the price of oil, not
to make a profit. Don't forget we made $10
million from the favorable effect of the oil price
increases on our business.

President: What's that got to do with it? That's

like saying that we do not need to worry when our
sales are down in California because they are up
in New York.

Treasurer: If the price of oil had gone down . . .

President: I don't care what would have happened if the price of oil had gone down. The fact is that it went up. I
really do not know what you were doing playing the futures markets like this. Our shareholders will expect us to
have done particularly well this quarter. I'm going to have to explain to them that your actions reduced profits by
$10 million. I'm afraid this is going to mean no bonus for you this year.

Treasurer: That's unfair. I was only . . .

President: Unfair! You are lucky not to be fired. You lost $10 million.

Treasurer: It all depends on how you look at it . . .

B. Hedging and Shareholders

Against hedging Support hedging
- SHDs can do the hedging - SHDs don’t have as much info as
themselves, company don’t need to the company
do it - Large transactions are less
expensive and possible than small
transactions

- SHDs can diversify their port - It’s an open question

C. Nature of hedging in the industry

Gold Jewery Profit of Hedge Profit of
commodity (output) Company Not_hedge
(input) (Fixed gold price) Company
Rise Rise Rise Constant
Fall Fall Fall Constant

FMP - in-class Example page 28

5.4. Basis: bt = St - f t
Case 1: AN OIL REFINERY is afraid of increasing crude
oil price in the future
Use crude oil futures to hedge for crude oil price, futures
contract’s maturity is the same at the hedge expiration
date:
Case 2: AN OIL REFINERY is afraid of increasing crude
oil price in the future
Use crude oil futures to hedge for crude oil price, futures
contract’s maturity is different from the hedge expiration
date:
Case 3: VIETJET AIR is afraid of increasing Avgas
(Aviation gasoline) price in the future
Use crude oil futures to hedge for Avgas price, futures
contract’s maturity is the same at the hedge expiration
date: (Cross hedge)
(Basis) Eg.1. It is March 1. A US company expects to
receive 50 million Japanese yen at the end of July. Yen
futures contracts on the CME Group have delivery
months of March, June, September, and December. One
contract is for the delivery of 12.5 million yen. The
company therefore shorts four September yen futures
contracts on March l. When the yen are received at the
end of July, the company closes out its position. We
suppose that the futures price on March 1 in cents per yen
is 0.9800 and that the spot and futures prices when the
contract is closed out are 0.9200 and 0.9250,
respectively.
(Basis) Eg.2. It is June 8 and a company knows that it
will need to purchase 20,000 barrels of crude oil at some
time in October or November. Oil futures contracts are
currently traded for delivery every month on the
NYMEX division of the CME Group and the contract
size is 1,000 barrels. The company therefore decides to
usethe December contract for hedging and takes a long
position in 20 December contracts. The futures price on
June 8 is $88.00 per barrel. The company finds that it is
ready to purchase the crude oil on November 10. It
therefore closes out its futures contract on that date. The
spot price and futures price on November 10 are $90.00
per barrel and $89.10 per barrel.

FMP - in-class Example page 29

5.5. Practice hedging
5.5.1 Calculating the Hedge Ratio (h)
Formula:

If hedged asset = underlying asset of futures ρ = _____ and

σS = σf  h* = ______
If ρ = 1 and σf = 2σS  h* = ______
*** h* = 0.5 means _________________

5.5.2 Optimal number of contracts

(Hedging) Eg.3. An airline expects to purchase 2

million gallons of jet fuel in 1 month and
decides to use heating oil futures for hedging. In
this case, the usual formulas for calculating
standard deviations and correlations give σf =
0.0313, σS = 0.0263, and ρ = 0.928

5.5.3 Hedging an equity portfolio

(Hedging) Eg.4.
Value of S&P 500 index = 1,000
S&P 500 futures price = 1,010
Value of portfolio = $5,050,000
Risk-free interest rate = 4% per annum
Dividend yield on index = 1% per annum
Beta of portfolio = 1.5

FMP - in-class Example page 30

(Hedging) Eg.5. Adjust Beta to
(i) 1

(ii) 2

5.5.4 Strip Hedge And Stack Hedge

Eg. 6.At beginning of the year, an oil Strip hedge

distributor agrees to deliver 1,000 Long 04 contracts for delivery with different
barrels/quarter of crude oil in each of the next maturity
4 quarters, at a fixed price. The firm faces the Stack hedge
risk that crude oil prices will rise, and + Jan: Long 04 March contracts.
therefore will enter into a long hedge. + March: Short the March contracts and long
03 June contracts.
+ June: Short the June contracts and Long 02
Sep contracts
+ Sep: Short the Sep contracts and Long 01
Dec contracts

Additional question: Thị trường thực cần thực hiện vào tháng 9, trên thị trường chỉ có hợp đồng futures tới hạn
tháng 8 và tháng 10, nên chọn hợp đồng tương lai nào để hedging?

FMP - in-class Example page 31