hw2econ351fall2017.doc - Name Last 4(PSU ID First 2 letters...

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Name _______ _________ _________ Last 4 (PSU ID) ________ First 2 letters of last name _____ Homework Assignment #2 – ( 221 total points ) Econ 351 –Fall 2017 –PLEASE STAPLE, DUE, Monday 9/25 /17 AT THE BEGINNING OF CLASS: NO LATE HWS ACCEPTED. YOU MUST USE THIS AS A TEMPLATE – THAT IS – MAKE SPACE FOR YOUR ANSWERS BY HITTING ENTER (you certainly don’t need to type this assignment)– LEAVE THE QUESTIONS AS THEY ARE – AND PLEASE STAPLE ! NOTEBOOK PAPER (OR ANY PAPER ) STAPLED TO THE BACK IS NOT ACCEPTABLE (GETS A ZERO) . ALSO, PLEASE PUT THE FIRST TWO LETTERS OF YOUR LAST NAME IN THE TOP RIGHT HAND CORNER OF THIS PAGE SO THAT WE CAN ALPHABETIZE THESE EASILY. THANKS IN ADVANCE! 1) (75points) From the article titled "How Traders Are Making Money as Oil Prices Go Nowhere " Many traders are adapting by pursuing what is known on Wall Street as a mean- reverting strategy, generally one that wagers prices will fall when oil is above a certain level and rise when it declines below a threshold. In this problem we adopt the 'mean reverting' strategy and define the "certain level" as $50 a barrel. So when it rises above, bet on it coming back down and when it falls below 50, bet on it rising back up. Consider the graphic below - very similar to the graphic in the article. 1
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Click Here for the specifications on oil futures contracts. Suppose we opened up our bets at point A, where the price of oil futures is $55. We consider 3 different short positions: Scenario #1: We sell ten futures contracts with a futures price of $55 per barrel (point A) and close and point B, where the futures price is $50. Scenario #2: We buy 10 Futures Options puts with a strike price of $55 for $1700 per put and close at expiration when the futures price of oil is $50 per barrel. Scenario #3: We write (sell) 10 Futures Options calls with a strike price of $55 for $1700 per call and close at expiration when the futures price of oil is $50 per barrel.
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