Examination 2023/24
Module Code and Title: 7SSMM712 – Topics in Applied Finance
Coursework: Commodities, Period 2, March 2024.
SECTION A – ANSWER ALL QUESTIONS
Question 1
You are provided the following note from an Investment Bank:
Plus the following additional info:
bbl = 1 barrel of crude oil
Mbbl = 1 million barrels of crude il = storage capacity of Suezmax vessel
Suezmax freight rate of $30k/day = $30,000 per day
Storage cost of $1.30bbl/month includes freight for hiring the vessel + expenses for loading and unloading the cargo + port, bunkering and other vessel costs.
Answer the following:
a) Is the Oil Futures curve in contango or backwardation? What is the arbitrage trade on oil that the traders perform? How do they lock in their profit from day 1? Present your calculations.
b) Compare the profit from the spreads in the arbitrage trades in oil with the storage cost for each of the 3, 6, 12-month periods. Which arbitrage trades are profitable after storage cost? What kind of employment of the Suezmax vessel is described in this note? What is the effect of this type of vessel employment on the global supply of Suezmax vessels (tanker market), the freight rates of the Suezmax vessels (tanker market) and on the arbitrage spread between the spot and the future oil price (oil market)?
c) Estimate what portion of the storage cost (1.30bbl/month) is attributed to the vessel freight rate and what portion to the rest of storage expenses
d) Assuming the Suezmax freight rate jumps to $50K/day, estimate what the effect will be on the ability of the traders to do the arbitrage (oil market). Show your calculations. How will this affect the tanker market and the oil market (in terms of demand and supply)?
[50 marks]
Question 2
Lucy has a sizeable investment portfolio consisting of international equities and bonds. On the back of increasing international geopolitical tensions and upcoming elections in US, UK and Germany, she would like to establish a long position in gold as a hedge.
Discuss the role of gold as a portfolio hedge and outline and compare the main vehicles that can be used for the implementation of this position.
[50 marks]