BF054E: What Really Measures the Price of oil, Various Metrics, Price of Crude: Derivatives (Finance) Assignment, ISCA

University Institute of Singapore Chartered Account (ISCA)
Subject BF054E: Derivatives (Finance)

Assignment Brief: 

1. What measures the price of oil, various metrics, price of crude, futures, etc?

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

BF054E : Financial Derivatives

3. On the same day, the WTI crude futures contract, is 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.

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.

5. If the futures price turns negative, will the future option price also goes to negative? Or the option strike price will be adjusted to a negative value, but the futures options premium is still positive? Please answer this question based on the table.

BF054E: Derivatives (Finance) Assignment


6. Does the Black-Scholes option pricing formula still work for pricing the futures option? If not, why doesn’t it work? How to solve the option pricing problem allowing negative underlying price? (Hint: exchange employed Bachelier model, please explain this model.)

7. A negative oil price is for the first time in history, and it unthinkably deviates from the past seasonality. What do you think is the reason leading to this oil price crash?

  • Does Covid-19 relate to the Oil price?
  • What are the choices of futures buyers near the last trading day in a delivery month? What does it mean that the futures seller market corner the futures buyer?
  • Can oil producer reduce their production or even close the well and reopen it later?
  • 1933 Wisconsin milk strike, resulting in the dumping of the milk. What is the difference between Crude oil and milk?
  • 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?

8. How was Brent’s oil price? Was it also negative? Where is the Brent oil market-based? (2 marks)

9. When it rebounds which of the prices are going to rebound quicker, Crude barrel price, futures, options, the price at the petrol pump?

10. Does a negative Crude oil price mean that filling the car will suddenly get cheaper? How does the negative WTI oil price impact the Gasoline index (CTXBTR) and Futures (RBc1)? Explain.

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