VenkateshREOCWeek2 (1)

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Apr 27, 2024

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EOCProblemTemplateV4.docx 1 FRED* Evaluation Form for Hull EOC Problem Student Name: Ramya Venkatesh EOC Problem Statement: 3.24 It is now June. A company knows that it will sell 5,000 barrels of crude oil in September. It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000 barrels of ‘‘light sweet crude.’’ What position should it take? What price risks is it still exposed to after taking the position? Instructions 1. Download and save this file using the naming convention (Last Name, First Initial, EOCWeek(number)). Week 2 example: SlivkaREOCWeek2.docx. 2. For each of the 2 EOC questions this week, complete the Non-AI Solution (Part 1) and the AI Solution (Part 2) below. Submit your file (Absent Parts 3-5) by Sunday, midnight prior to the forthcoming Tuesday lecture. 3. On Monday prior to the Tuesday lecture, the Hull Solutions for the 2 EOC problems in this file will be posted by the Course Assistants for you to read and insert into Part 3. 4. Complete Parts 4 and 5 of your prior submission where you rate the Non-AI and AI solutions against the Hull Solution and add helpful comments. 5. Resubmit this revised completed Form on Brightspace using the identical naming convention as above with a V2 version number. Week 3 example: SlivkaREOCWeek3V2.docx Part 1 Student Personal (Non-AI) Solution (Insert Here) The company should short 5 futures contract. It is exposed to basis risk, difference between October futures price and spot price of crude oil in September. Part 2 AI Solution Mark Choice of AI with an X AI Choice FRED* Bing Chat ChatGPT X Google Bard *FRED = F inance and R isk E ngineering AI D esignee (ChatGPT, Bard, Bing Chat….) (FRED designates your choice of AI used in providing a solution to a Hull EOC Problem)
EOCProblemTemplateV4.docx 2 Your AI Prompt (Insert Here) I have a question from Derivatives(Finance), can you please answer the below question "It is now June. A company knows that it will sell 5,000 barrels of crude oil in September. It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000 barrels of ‘‘light sweet crude.’’ What position should the company take? What price risks is the company still exposed to after taking the position?" Can you please answer it accurately and precisely? Your AI Response (Insert Here) To hedge the sale of 5,000 barrels of crude oil in September using the October CME Group futures contract (which represents 1,000 barrels each), the company should take the following position: Short Position in October Crude Oil Futures Contracts: The company should take a short position in the October CME Group futures contracts for crude oil. Since each contract represents 1,000 barrels, the company should sell 5 contracts (5,000 barrels / 1,000 barrels per contract). By taking this short position, the company is essentially locking in the selling price for its crude oil at the current futures price for October. After taking this position, the company is still exposed to the following price risks: Basis Risk: This refers to the risk that the price of the physical crude oil the company intends to sell in September may not perfectly align with the price of the October futures contract. Basis risk can arise due to factors like differences in quality, location, or timing between the futures contract and the actual crude oil sale in September. Any discrepancy between the two prices can lead to gains or losses. Rolling Risk: Since the company is using an October futures contract to hedge a sale in September, it will need to roll over its futures position from October to September as the October contract approaches expiration. The price difference between the expiring October contract and the new September contract can result in gains or losses during the rollover process. Execution Costs: There may be costs associated with entering and exiting futures positions, such as brokerage fees and bid-ask spreads, which can impact the effectiveness of the hedge. By taking these factors into account, the company can better assess the overall effectiveness and cost of its hedge and manage its price risk exposure accordingly.
EOCProblemTemplateV4.docx 3 Part 3 Hull EOC Solution After you submit your Non-Ai and AI solutions, the Hull solution will be released and you can proceed to Parts 4 and 5. Once completed, resubmit this Form including your Ratings (Part 4) and any Helpful Comments (Part 5). Part 4 Your Ratings vs Hull Solution Mark your ratings with an X Your Rating --- 🡪 1 = Poor 2 3 4 5 = Excellent Non-AI vs. Hull Solution FRED vs. Hull Solution Part 5 Add Comparative Analysis and Comments (Insert Here) In my opinion, as many students attempt to complete this task, the ChatGPT model seems to improve directly through repeated questions and corrections provided by users. Since I started my assignment on a Sunday evening, the model appeared to be well-versed with the questions already.
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