Test - V01-1 - No Answers Nodate
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COURSE REVIEW EXAMINATION PAPER
COURSE: ENERGY DERIVATIVES AND RISK MANAGEMENT
1. Definition of a futures contract is:
A standardised contract to supply a specified quantity of a specified product at a specified
price in a specified period in the future. A standardised contract to supply a specified quantity of a specified product at a price to
be agreed in a specified period in the future entered into through a regulated exchange. A standardised contract to supply a specified quantity of a specified product at a specified
price in a specified period in the future entered into through a regulated exchange. A standardised contract to supply a specified quantity of a specified product at a specified
price in any period in the future entered into through a regulated exchange.
2. A swap is:
A contract to exchange one futures contract for another. A financially settled contract for difference between two variable prices or between a
variable and a fixed price for specified commodities at specified locations and at specifieddates/periods. A contract to exchange an equal quantity of a specified commodity at a specified price in
different locations at a specified future date/period. A contract to exchange an equal quantity of a specified commodity at a specified price in
different locations at a specified future date/period or at different dates but in the same
location.
3. An option is:
A right but not an obligation to buy/sell a specified product at a future prevailing market
price at a specified future date or within a period of time.
A right but not an obligation to buy/sell a specified product at a specified price at aspecified future date or within a period of time. A right but not an obligation to buy/sell a specified product at today’s prevailing market
price at a specified future date or within a period of time.
4. When you trade futures your contract counterparty is:
The original party you have done the deal with The exchange The clearing house The broker Your clearing member Your counterparty’s clearing member
5. When you are short futures and go to delivery in a physically settled (deliverable)
futures market, which price will you invoice your physical buyer at?
The price of the original transaction. The settlement price of the first-nearby futures contract at the day of delivery. The final settlement price of the futures contract with your month of delivery. The average of the last month settlement prices of the futures contract with your month of
delivery.
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6. What constitutes forward curve?
Prices of the spot market, first-nearby, second-nearby, …., last traded month futures as
exist today. Prices for individual delivery month futures predicted to exist in the next few months (e.g.
prices for next December delivery futures predicted to prevail in January, February,
March, …, November).
7. In the futures terminology the Basis means:
The delivery basis as defined by the futures contract specifications. The difference between a futures price and a spot price. The difference between the prices of two futures contracts with different delivery months
as of today.
8. What does the term EFP means?
Expected Future Price
Estimated Factor Performance Exchange of Futures for Physical
9. What term describes the process which ensures that the final settlement price of a
futures contract reflects the real spot price of the underlying commodity?
Convergence Contango Covariance Variance
10. Which of the following correctly describes the relationship between forward and
spot prices (assuming the interest rates being constant)?
Forward price today equals the spot price today, adjusted for carry and convenience yield. Forward price today equals the expected spot price in the future, adjusted for carry and
convenience yield. Forward price under risk-neutral measure equals the expected spot price in the future,
adjusted for carry and convenience yield. Forward price today equals the expected spot price in the future, under risk-neutral
measure. Forward price in the future equals the expected spot price in the future.
11. Which of the following statements correctly defines the fair value of a futures
contract today?
Expected difference between the spot price in the future and the futures price today. Expected difference between the spot price in the future and the futures price today,
discounted by risk-free rate. Expected difference between the spot price in the future and the futures price in the
future, discounted by risk-free rate.
12. A long position in a futures market arises:
When you take delivery under a futures contract When you buy a futures contract
When you sell a futures contract
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13. A short position in a fixed-to-floating swap arises:
When you receive the fixed price and pay the floating price When you pay the fixed price and receive the floating price When floating and fixed prices are equal.
14. A short position in an options market is:
When you sell a put or a call option When you buy a put option When you buy a call option When you buy a call and sell a put option.
15. An Outright position is:
A net short or long position in a futures or a physical market. A combination of short and long positions in a futures or a physical market.
A large short or long position in a futures and a physical market.
16. A futures Spread position is:
A combination of a short position in one futures contract with a short position in another
futures contract A combination of a long position in one futures contract with a long position in another
futures contract. A combination of a short position in one futures contract with a long position in another
futures contract.
17. The Delta-position is: The size of the position in the underlying trading instruments divided by its P&L. The ratio of the changes in the value of your portfolio to small changes in the prices of the
underlying trading instruments (how quickly your P&L changes when the underlying
price changes). The ratio determining how the value of an option changes with the changes in the
volatility (how quickly your option value changes when the market volatility changes).
18. The valuation of an option is concerned with finding a solution to which problem?
Calculation of the discounted value of the option premium. Calculation of the ultimate pay-off at the expiry of the option. Calculation of probability that the option will expire in-the-money.
19. If you are long an American style put option @ strike price USD 10/mt, when would
you exercise such option?
At any date up to and including the expiry date if the market price is > 10 At any date up to and including the expiry date if the market price is < 10 Solely at the expiry date if the market price on that date is > 10 Solely at the expiry date if the market price on that date is < 10 Solely at the expiry date if the market price today is > 10 Solely at the expiry date if the market price today is < 10
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20. The value of an option changes non-linearly in relation to the value of the underlying
commodity or futures because (among other factors) of:
The Delta The Gamma
21. You are short a call option @ strike price USD 10/mt, what is your risk and how
large can it be?
Unlimited risk of market price falling below the strike less the amount of premium Unlimited risk of market price rising above the strike less the amount of premium Risk of market price falling below the strike, limited by the amount of premium Risk of market price rising above the strike, limited by the amount of premium Risk of market price not rising above the strike by more than the amount of premium Risk of market price not falling below the strike by more than the amount of premium No quantifiable risk
22. To which interval the underlying market price F(t) of a product belongs when a put
option for that product with strike price USD 10.00 is said to be in-the-money?
F(t) < 10 F(t) > 10 F(t) = 10
23. You hold a put option with strike price USD 10.00. The premium for the option was
USD 1.00, the market price today is USD 9.00. What is today’s mark-to-market
P&L for the position if the option were to expire now?
20
19 18 11 9
2
1 0 -1 -2
-9
-11 -18 -19 -20
24. You wrote a call option with strike price USD 10.00. The premium for the option
was USD 1.00, the market price today is USD 9.00. What is today’s mark-to-market
P&L for the position if the option were to expire now?
2019 18 11 9
21 0 -1 -2
-9-11 -18 -19 -20
25. You wrote a call option with strike price USD 10.00. The premium for the option
was USD 1.00, the market price today is USD 20.00. What is today’s mark-to-
market P&L for the position if the option were to expire now?
31 29 11
9
1 0 -1
-9
-11 -29 -31
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26. You are long physical. You want to hedge against an adverse price movement but
want to retain ability to profit from a favourable price movement. Which strategy
will you use?
Buy futures. Sell futures.
Buy a put option. Buy a call option. Write a put option. Write a call option.
27. You are long December futures @ USD10.00/mt and the price at which December
futures are traded today is USD 14.00/mt, what is your MTM P&L per mt?
24 14 10
4 0 -4
-10 -14 -24
28. You are long 20 lots February futures @ USD 12.00/mt and short 20 lots March
futures @ USD 11.00/mt. Assuming that the size of 1 lot = 100 mt, what is the total
size in mt of your position?
0 mt – position balanced. 2000 mt outright long 2000 mt outright short 2000 mt spread 4000 mt outright long 4000 mt outright short 4000 mt spread
29. Today, the price of the February futures is USD 14.00/mt and the price of the March
futures is USD 12.00/mt. What is your P&L per mt (for the position from question
28 above)?
USD 3.00/mt USD 2.00/mt USD 1.00/mt USD 0.00/mt USD -1.00/mt USD -2.00/mt
USD -3.00/mt
What is the total P&L for the entire position? USD _______________
30. The shape of the forward curve implied by the question 29 suggests that the market
is:
Backwardated In contango Flat Heteroskedastic
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31. You have a contract to deliver some Natural Gas to Florida in December at the price
as published in Platt’s IFERC for Florida Gas Transco Zone 3 for the month of
delivery. You are planning to cover that obligation by buying spot gas at Henry Hub
in December. What risk will you be exposed to?
Outright short Florida spot
Outright long Florida spot Outright short Henry Hub spot Outright long Henry Hub spot Outright short Henry Hub futures Outright long Henry Hub futures Spread: Long Florida spot – short Henry Hub futures Spread: Short Florida spot – long Henry Hub futures Spread: Long Henry Hub spot – short Henry Hub futures Spread: Short Henry Hub spot – long Henry Hub futures Spread: Long Florida spot – short Henry Hub spot
Spread: Short Florida spot – long Henry Hub spot
32. Which hedging strategy will you pursue (NG = HH futures contract, HB = Henry
Hub basis swap, FP = Florida Gas Transco Zone 3 basis swap)?
Buy December HB swap, sell December FP swap Sell December HB swap, buy December FP swap Buy December NG futures, sell December FP swap Sell December NG futures, sell December FP swap Buy December HB swap and NG futures, sell December FP swap Buy December HB swap, sell December NG futures and FP swapSell December HB swap and NG futures, sell December FP swap Sell December HB swap, buy December NG futures and FP swap
33. You now have a similar contract to supply gas to Florida in April at Platt’s IFERC
for Florida Gas Transco Zone 3 for the month of delivery. You acquired your own
gas producing company and want to lock in the currently profitable margin for your
production in April. Which hedging strategy will you pursue (NG = HH futures
contract, HB = Henry Hub basis swap, FP = Florida Gas Transco Zone 3 basis
swap)?
Buy April HB swap, sell April FP swap Sell April HB swap, buy April FP swap
Buy April NG futures, sell April FP swap Sell April NG futures, sell April FP swap Buy April HB swap and NG futures, sell April FP swap Buy April HB swap, sell April NG futures and FP swap Sell April HB swap and NG futures, sell April FP swap Sell April HB swap, buy April NG futures and FP swap
34. You are long March NQ – Tennessee Zone 0 Basis Swap @USD -0.4975. Its floating
price is defined as “IFERC Tennessee Zone 0 index price minus the final settlement
price of the NYMEX natural gas futures contract for the corresponding month”.
Today the swap is quoted @USD -0.4800 per million BTUs.
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Your MTM P&L per million BTUs = USD____________________________________
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35. You initially bought 20 lots of December futures @ USD 10.00/mt. Each lot holds
100 mt of product. The exchange set the initial margin @ USD 100.00 per lot. You
have a USD 5,000 deposit on account with your broker.
Day 1 settlement price was USD 8.00/mt. What is your total equity and total funds with
the broker? What is the amount of the margin call, if any?
Closing cash balance: 5,000 5,000 + no other cash movements
Open position: -4,000 (8 – 10) * 20 * 100
Total equity: 1,000 5,000 + (-4,000)
Initial margin: 2,000 100 * 20
Total funds: -1,000 1,000 – 2,000
Margin call: 1,000
Day 2 – you bought 10 more lots @ 8.00/mt and paid the previous day’s margin call. Day
2 settlement price was 9.00/mt. What is your total equity and total funds with the
broker? What is the amount of the margin call, if any?
Closing cash balance:
Open position:
Total equity:
Initial margin:
Total funds:
Margin call:
36. What type of commodity price models attempts to describe the expected dynamics of
the future prices from the mathematical perspective without identifying which
economic factors drive that dynamics?
Black-Scholes models Fundamental models Stochastic models. EWMA models.
37. Which type of process is used to simulate the independent risk factors in
commodities price modelling?
GARCH Brownian Motion
Discounted price process Binomial forest
38. Which empirical characteristic(s) of commodities prices does not conflict with the
assumption of their normal distribution?
Leptokurtosis or “Fat Tails” Mean reversion Positive skewness Price spikes All of the above None of the above
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39. Which statement below does not correctly define the meaning of VaR?
VaR is the loss corresponding to the specified quantile of the change in the value of a
given position over a specified holding period. VaR is the specified % (defined by the required confidence level) of the maximum loss
expected to be incurred by the position over the holding period. VaR is the maximum loss expected to be incurred by the position over the holding period
in a specified % (defined by the required confidence level) of best cases. VaR is the minimum loss expected to incurred by the position over the holding period in a
specified % (defined as 1 minus the required confidence level) of worst cases.
40. It can be said that the statement “VaR(95%, 1 day) = USD 10,000,000” means that:
The position needs USD 10,000,000 capital to cover the margin call. The position is likely to cause a loss equal to 95% of USD 10,000,000 The daily P&L movement for the position is not expected to exceed USD -10,000,000 5%
of the time. The probability of the daily P&L movement exceeding USD -10,000,000 is 5%. The probability of the daily P&L movement exceeding USD -10,000,000 is 95%.
41. List 3 most commonly used methods of VaR calculation:
_________________
_________________
_________________
42. What is(are) the main deficiency(ies) of VaR measure?
Assumption of normal distribution
Non sub-additivity Lack of indication of the magnitude of the maximum loss possible All of the above None of the above
43. Expand the following abbreviations:
VaR = _________________________ at risk CVaR = _________________________ at risk PaR = _________________________ at risk CFaR = _________________________ at risk
LVaR = _________________________ at risk
44. What is the principle of the historical method of VaR calculation?
Estimation of historical volatility of the price of the underlying commodity. Estimation of historical volatility of the P&L of today’s position if it existed in the past. Finding a specified quantile of the worst losses the today’s position might have incurred if
it existed in the past. Calculation of the worst case loss the today’s position might have incurred if it existed in
the past.
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45. What is(are) the main advantage(s) of the Monte-Carlo method of VaR calculation?
Computational intensity Possibility to use complex multi-factor price models Simplicity
All of the above None of the above
46. Which is the riskiest position (sigma95% = 1.64, sigma98% = 2.05, sqrt(10) = 3.16)?
VaR(95%, 1 day) = USD 10,000,000 VaR(95%, 10 days) = USD 28,000,000 VaR(98%, 1 day) = USD 10,000,000
47. Which is the riskier position (sigma95% = 1.64, sigma98% = 2.05, sqrt(10) = 3.16)?
VaR(98%, 1 day) = USD 12,500,000; ETL = USD 12,000,000
VaR(95%, 1 day) = USD 10,000,000; ETL = USD 18,000,000
48. How would you adjust the VaR reporting parameters if you are concerned that it
may become difficult to liquidate some of the trading instruments in your company’s
portfolio due to the limited liquidity in the market?
Increase the confidence level. Increase the holding period. Leave VaR parameters unchanged but reduce trading limits.
49. What is the purpose of back-testing VaR?
Determine if the adopted VaR model adequately predicts the magnitude and frequency of losses. Calculate the opportunity cost of the corporate VaR limits. Determine the maximum amount of loss likely to be incurred given an extreme market
movement.
50. For each line in the following table mark the column of the department which
should have the primary responsibility for the specified function:
Function Front Office Middle Office Back Office
Trade origination
Trade reporting/entryPositions reconciliation
M2M P&L calculations
Receiving 3rd party confirmations
Realised P&L calculations
Invoicing and settlements
Forward curves verification
Organising physical delivery
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