Commodities Capstone

Transcription

1 RIT Case Brief COM5 Build 1.02 Commodities Capstone The Commodities Trading 5 Case challenges traders ability to respond to the highly dynamic world of commodity trading. Primarily, traders will buy and sell crude oil and related products in response to their analysis of various news releases affecting the price of oil. In addition, traders will be challenged to take advantage of arbitrage opportunities occurring in the spot and futures markets as well as across different locations and crude oil products. Lastly, traders will learn about the physical requirements to trade physical product, such as storage, pipeline (transportation) and refinery costs. Description The Commodities Trading 5 case will consist of 2 periods of 10 minutes each. There are 7 tradable securities and 6 assets. Trading from Excel using the Rotman API will be disabled. Real time data (RTD) links will be enabled. Market Dynamics Parameter Value Trading time per heat 1200 seconds (20 minutes) Calendar time per heat 2 months Number of periods per heat 2 Trading time per period 600 seconds (10 minutes) Calendar time per period 1 month Max order size 30 contracts Mark-to-market frequency Daily (every 30 seconds) Securities Securities Description Contract Size Shortable CL Crude oil spot (in Cushing) 1,000 No CL-AK Crude oil in Alaska 1,000 No CL-NYC Crude oil in New York City 1,000 No CL-1F Month 1 futures contract for CL 1,000 Yes CL-2F Month 2 futures contract for CL 1,000 Yes HO Heating Oil 42,000 Gallons No RB RBOB Gasoline 42,000 Gallons No Kevin Mak* and Tom McCurdy** prepared this case for the RIT market simulation platform, *Manager of the Financial Research and Trading Lab, Rotman School of Management; **Professor of Finance and Founding Director of the FRTL, Rotman School of Management, University of Toronto. Copyright 2014, Rotman School of Management. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the permission of Rotman School of Management.

2 Traders will be able to utilize the following assets which are required for storing, moving, or refining physical crude product. Assets Assets Description Capacity Transport or Cost Conversion Period CL-STORAGE Storage for Crude Oil Spot 10K N/A in Cushing AK-STORAGE Storage for Crude Oil in 10K N/A Alaska NYC-STORAGE Storage for Crude Oil in 10K N/A New York City AK-CS-PIPE Pipeline from Alaska to 10K 1 Day (30 seconds) $40,000/use Cushing CS-NYC-PIPE Pipeline from Cushing to New York City 10K 1 Day (30 seconds) $20,000/use CL-REFINERY Crude Oil Refinery (3:2:1) 30K 1.5 Days (45 seconds) $300,000 per 2 days *Note: There are no storage requirements for the physical products: RBOB Gasoline and Heating Oil. Automatic storage at no cost can be assumed for these products. Traders will need to focus on four main models that interact with the physical (spot) market for crude oil: the fundamental model, the storage model, the transport model and the refinery model. In the fundamental model, traders will receive news releases affecting the supply of crude oil, which can be used to forecast commodity prices. These releases will be amongst updates on geopolitical news and general economic indicators further affecting the energy market in North America. Traders will respond to the various news releases by buying and selling futures contracts. In the storage, transport, and refinery models, traders will balance the costs of operation with expected returns to earn arbitrage profits. For example, based on the refinery s fixed cost to operate, traders can calculate when it s profitable to purchase crude oil, convert it into products, and sell the products. Similarly, traders can calculate when it s profitable to purchase crude in Alaska, transport it to Cushing, and sell crude oil spot. Fundamental Model The fundamental model will test the ability of traders to correctly interpret news releases and predict the price impact on crude oil. The fundamental value of crude oil is based on two distinct factor shocks: news effects and the weekly EIA reports. In this case, all news releases are independent of one another. Copyright 2014, Rotman School of Management. 2

3 There are 8 weekly EIA reports that will be released. Each report will contain an expected storage build/draw, and the actual storage build/draw. The fundamental value of CL will adjust at a ratio of $1 for every 10 million barrel differential. For example, if analysts expected a 6 million barrel build, and the actual EIA value was a 16 million barrel draw, the price of CL would increase by $2.20. (expected +6, actual -16, difference +22). In addition, there will be news reports that mention geopolitical events (pipeline outages, geopolitical tension, etc.) that will affect the supply or demand for crude oil. You should, if at all possible, quantify the effect of these events - as they will also have an effect on the price of crude oil (CL). These events will have an effect on the price, but weekly storage values are not directly linked to them. Information Release Schedule Time elapsed Release 90 seconds 1st Week EIA Report 240 seconds 2 nd Week EIA Report 390 seconds 3 rd Week EIA Report 540 seconds 4 th Week EIA Report 600 seconds End of period Random times News Reports Storage Model Traders must lease storage before buying spot crude oil. A storage tank holds up to 10,000 barrels of crude oil and costs $500 per day (charged every 30 seconds). Each storage tank must be leased in its entirety (i.e. traders cannot lease half a tank). Note that futures contracts settle at the end of their respective months and settle into physical product. If traders are long one futures contract of Month 1 crude oil at the end of the first month, they will receive 1,000 barrels of crude oil spot. If they are short one contract of Month 1 crude oil at the end of the first month, they will be required to deliver 1,000 barrels of crude oil spot. If traders do not have sufficient storage upon settlement of their futures contracts, a storage unit will automatically be leased at a penalty of $2500 per unit in addition to regular lease prices. There are three storage tanks available for lease, one for crude oil in each region: CL-STORAGE, AK- STORAGE, NYC-STORAGE. Traders are limited to having up to 10 of each storage unit simultaneously. The risk-free rate and convenience yield are both assumed to be zero so that storage costs are the only component of cost-of-carry for this case. Transportation Model Traders are able to transport crude oil from one location to another. Doing so effectively converts crude oil in location A to crude oil in location B. For example, transporting 1000 barrels of crude oil from Cushing to NYC converts 1000 barrels of CL into CL-NYC. Copyright 2014, Rotman School of Management. 3

4 In order to transport crude oil, traders must lease and use pipelines. Unlike storage, pipelines must be used immediately after lease. The transport process will take 30 seconds to complete. The pipeline will automatically be released at the end of the lease period. There are two pipelines available: AK-CS-PIPE and CS-NYC-PIPE. (Oil only flows one way in these pipes, from the location of supply to the location of demand). Traders are limited to leasing up to 10 of each pipeline simultaneously. A pipeline can transport up to 10,000 barrels of crude oil at a time and costs $40,000 per use and $20,000 per use for AK-CS-PIPE and CS-NYC-PIPE, respectively. This cost is subject to change at random times during the case. Traders will be notified of changes to pipeline costs through news releases. Refinery Model Traders are able to refine crude oil to produce RBOB gasoline and heating oil. The Crude Oil Refinery (3:2:1) converts 3 contracts (3000 barrels) of crude oil in Cushing into 2 contracts (84,000 gallons ) of RBOB gasoline and 1 contract (42,000 gallons) of heating oil, hence the (3:2:1) specification. Each trader will be limited to using one refinery at a time. To refine crude oil, traders must lease refineries. The lease price covers the cost of production, additives, and the facility. Each lease period is 2 days (60 seconds), and the refining process will take 45 seconds to complete. Once the refinery process is complete, traders must release the refinery otherwise they will be charged for another lease period of 2 days. There is one refinery available in Cushing: CL-REFINERY. Trading Limits and Transaction Costs Each trader will be subject to gross and net trading limits of 500 contracts and 100 contracts respectively. The gross trading limit reflects the sum of the absolute values of the long and short positions across all securities and cannot exceed 500 contracts. The net trading limit reflects the sum of long and short positions such that short positions negate any long positions and has an upper bound of 100 contracts of crude equivalent products. Trading limits will be strictly enforced and traders will not be able to exceed them. For example, a long position of 1 crude oil contract (1000 barrels) and a short position of 1 futures contract (1000 barrels) results in a net limit usage of 0/100 and a gross limit usage of 2/500. Similarly, for heating oil or RBOB gasoline, a long position of 1 contract (42,000 gallons) and short position of 1 contact result in a net limit usage of 0/100 and a gross limit usage of 2/500. The maximum trade size will be 30 contracts, restricting the volume of contracts transacted per trade to 30. Transaction fees will be set at $1 per contract traded. Position Close-Out Copyright 2014, Rotman School of Management. 4

5 All positions will be marked-to-market every 30 seconds with any profits and losses reflected in the traders cash balance by the mark-to-market operation. Futures contracts will settle at the end of each period and be converted into CL. The final value of CL will be based on the formula described earlier. Crude in Alaska and NYC, and the RBOB and HO products will be valued at their last traded price. Computerized market makers will increase the liquidity in the market towards the end of trading to ensure the closing price cannot be manipulated. Key Objectives Objective 1: Generate profits by reacting to news headlines and going long crude oil and its related products during supply shortfalls and shorting them during times of supply excess. This will create profits from changes in the price of the crude oil, futures and products. Objective 2: Design a model to calculate the effect of news releases on the price of crude oil products in order to maximize trading profits. Traders will be provided with a basic RIT-linked Excel model which will allow them to input their expectations to generate buy/sell signals. It is highly recommended that traders enhance this basic model or design one from scratch in order to more effectively trade and understand the case. Objective 3: Find and capitalize on arbitrage opportunities between different crude oil locations, futures and products. Traders may go one step further and incorporate arbitrage indicators into their model to notify them of arbitrage opportunities in order to maximize potential profits. Copyright 2014, Rotman School of Management. 5