Treasury and Risk Management

This is designed to test students on designed to test students on Topic (Mechanics of option markets) and on Topic (Trading strategies involving options). Students are expected to research on the consequences of a certain group’s decision on energy production. The emphasis is on analytical thinking to assess the effectiveness and implications of competitors’ hedging strategies.

Case

On 27 October 2014, Organisation of Petroleum Exporting Countries (OPEC) members met in Vienna to reject calls for drastic action to cut their oil output from 30 million barrels per day and rolled over this production figure. OPEC has continually iterated that the organisation has no intention to meet again until June 2015. Market Observers believe a cut in production at this meeting is even less likely than at last November’s talks. Crude oil prices, as benchmarked by West Texas Intermediate (WTI) crude, have been falling since mid- June 2014 from the high of $107 per barrel to a 6-year low of $42.02 per barrel on 18 March 2015.

Questions

  1. Discuss the main reason for OPEC’s decision (up to June 2015) not to cut oil production.
  2. Using the WTI benchmark, discuss the effectiveness and implications of derivatives hedging strategies of Shale oil producers. Your answer should use the WTI spot price chart (from June 2014) to justify the types of options and futures strategies employed by these producers.

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