Description of Commodity Project Assignment:
Topic: Finance - Futures and Futures Contracts
This project deals with the characteristics of futures, futures trading, and futures hedging. The commodity chosen for this project is West Texas Intermediate (WTI) Crude Oil.
Scope:
1) For West Texas Intermediate (WTI) Crude Oil, find the contract description on the appropriate exchange (NYMEX). Provide a description of the contract specifications including:
a. Asset characteristics such as: Quantity, Deliverable grades (and premiums/discounts), delivery months and dates, delivery locations.
b. Pricing information including: Current price quote and actual contract value, tick size, and daily price change limits.
2) Estimate the total cost of carry from the commodity price using recent futures and spot prices.
a. Use three separate time periods to be used to look for consistent estimates. For example, maybe use "today's" prices, such as three consecutive days, day 1, day 2, and day 3 for spot prices. Then use three months, March, April, and May for the futures prices.
b. Finding individual components of the cost of carry can be difficult, so only find the total cost of carry.
3) Research recent trends for West Texas Intermediate (WTI) crude oil including: Recent price and volume trends, as well as relevant events and news.
Data:
Data on current and recent futures prices can be found at the CME's and the ICE's websites.
There are several sources for recent spot prices, but few give specific prices other than for the current date.
Write-up and Sections (6 pages maximum excluding the appendix):
The report isn't expected to have a "theme" to the report-the idea is to get a busy person up-to-speed very quickly with relevant information. The report must have the following four parts:
General overview: What is the commodity (WTI), what is it used for, who are the important traders in this market?
Contract details: Provide a description of the contract. Discussing every single item is not necessary, but it should give a busy person useful information. For example, describe the characteristics of what can be delivered. For a counterexample, you don't really need to discuss quoting and tick sizes in detail. Any tables should be included in the Appendix.
Cost of carry: In this section, explain the cost of carry, likely relevant factors for this commodity, and your estimation procedure. While the pricing formula might be relevant, reserve the rest of your calculations for the appendix. The result should be an estimate of the total cost of carry for your commodity. For example, you could conclude that the cost of carry for gold is a trivial 0.25%/year given the period analyzed.
Recent news: In this section, provide an overview of recent trends in the commodity. Include price trends and recent news. Citations of credible news or data sources is required. Again, the reader is a busy person who wants to get up-to-speed on relevant information quickly. Any tables should be included in the appendix.
Other written requirements: All figures, tables, and calculations should be included in the appendix of the actual document. Finance professionals, presenting numbers and data clearly are part of the job description, nice tables and charts are expected. Include original spreadsheets as well.
Format requirements:
- 6 pages (double-spaced) excluding the appendix.
- All tables, graphs, and figures should be included in the appendix, not in-line.
- 1" margins all around with 12 point Times New Roman font
- The spreadsheets should also be presented nicely.