Trading Strategies Involving Options (Coursework Sample)

Trading Strategies Involving Options Name Institution Trading Strategies Involving Options Question 1 The international market for oil is booming with more demand in countries where oil is not produced. Most countries live by expecting the prices of the product to fall drastically and in effect lower inflation in their economies. Many countries felt a sigh of relief after the meeting that took place in Vienna on September 27. The seminar was held by the Organization of Petroleum Exporting Countries (OPEC). In their mandate, the requirement was cut the quantity of daily crude oil fed into the market to below 30 million barrels. The meeting however ended without lowering the prices because of various reasons as explained subsequently. One of the reasons that made OPEC to lower the international daily production is the currently high rate of production among oil producing companies (Lawlar, 2014). A reduction in the excess supply has the consequence of drastically reducing income for oil producing companies (Hull, 2013). Furthermore, an expected drop in the prices in the international market pushed for the maintenance of the quantity produced to a lower figure in the international market. If OPEC would allow a decrease in the allowable daily quantity, it would become a problem especially to the poor members OPEC. Therefore, the body maintained the quality at 30 million barrels per day to protect such producers. The other reason for holding on to the quantity was the current level of oversupply in the economy. Currently many countries have joined OPEC with the objective of exporting their produce to the global market (Kent, 2014). When supply is high, the prices in the market reduce to a lower figure after responding to the forces of supply and demand. Therefore, there was no way OPEC could decide on reducing the daily quantity of oil with the already high level of supply in the market (Bittman, 2012). When countries produce oil, they look forward to selling it to international market through the effort of OPEC (Kent, 2014). Therefore, conventional requirement was to keep prevent the cut and allow the countries to continue operating. Some countries in the gulf have western sanctions imposed on them. These have no means of producing beyond a certain quantity to due international regulations. Some of these countries include Iran and Iraq (Kent, 2014). Moreover, OPEC had experiences a stiff completion from the west’s Shale companies. These American companies were producing adequate quantities of oil that spurred up a higher pressure in the international market (Whaley, 2006). A reduction in the international price would thus be a lee way to allowing the western producers to dominate the market. Already, OPEC had realized that its international share had plunged to a low of 32.29% in the first quarter of 2015 from 36.5% in the year 2008 (Kent, 2014). The stiff competition could not allow a cut in the daily production below 30 million barrels per day. That is why the deliberations of reducing the quantities become impotent. Finally, the OPEC remained under pressure of lowering the daily quantity or prices of the product in the international market (Lawlar, 2014). This is because it is currently facing a heavy competition from American players such as Shale. Nations such as Algeria and Venezuela were pushing for the cut or price reduction with the hope of producing products to meet the demand of the world market (Kent, 2014). They could accept a low cut of up to 2 million barrels per day with lower prices and in the process drive high cost Shale producers out of the market (Kent, 2014). Therefore, OPEC could not allow the cut but the meeting itself let to plunging of the prices in the market and this favored the low cost producers operating under OPEC. Question 2: West Texas Intermediate In the financial markets, speculations are means individuals and organization use in gaining profits. The West Texas Intermediate (WTI) is statutory body that acts as an observer of in the international market with the task of determining prices for user by participants in the international trade (Price, 2012). The shale oil produces in the west take much pride in the benchmarking because it assist them to hedge and gain profits using derivative hedging. In this regard, this section makes use WTI spot chart to determine the effectiveness of and implications of derivative hedging strategies of West’s Shale producers. In financial markets, hedging is the act of using derivatives such as options and contracts to limit investment risk with a view of making profit. For companies producing goods like the Shale oil producer, hedging has the implication of either increasing or reducing the profitability of the companies (Makan, 2013). Worse happens when competitors of the US in the Gulf region and the Middle East sell their crude oil in advance to guarantee higher revenues (Bouzoubaa, M. & Osseiran, 2010). In this case, the act exerts pressure on the crude oil to reduce its future price. This makes it hard for the companies to enter participate in contract hedging. The hedging strategies continue to take effect among the US oil producers. In 2011, the spot price chart of WTI showed a value of $ 105.00 per barrel. The price has then tumbled overtime to reach a low of $81 per barrel (Makan, 2013). At the same time, the producers of shale oil in the fields of Bakken have tripled their production (Jarrow, 2014). Many of these private companies have opted to using future contract to prove to sellers that their locked price is higher and suitable for facilitating more production. Hedging derivative is also particularly important in cases where the producers in determine future profitability. This happens in cases where the breakeven period differs from company to another due to a variation in the cost of production (Makan, 2013). This are areas where hedging is important in determining the future operating capability of the firm. A banker at the Americas exploration firm in charge of hedging spell out clear formulation on the way the process of hedging is dangerous for smaller firms (Kwock, 2008). They have to keep their hedges at a higher value above their costs of production if they wish to survive (Makan, 2013). The process is suitable because it allows such companies to re...