75 points
Purpose: Determine VaR for a futures position on a commodity that you have established.
Steps
1. Select an energy futures contract that you would like to trade (speculate or hedge).
2. Arbitrarily determine a dollar amount of your investment (initial margin per contract times the number of contracts).
3. Determine VaR using the following methods:
a. Delta Method –
See the article, “Value-at-Risk: An Overview of Analytical VaR”. Go over Examples 1, 2, and 3 in Part 2 article to determine VaR.
Use weekly holding period.
You need to compute standard deviation for the energy contract you selected.
If you use 5% chance (alpha), your z value will be 1.6449.
If you use 1% chance (alpha), your z value will be 2.3263.
4. Write a report. Please include the following:
a. Explain the riskiness of the futures position of the commodity.
b. Explain how the information on VaR (you estimated) will help assess the riskiness of the futures position on your commodity position.
Note: To compute standard deviation for your investment in futures contracts, obtain daily historical futures prices. I recommend using Energy Information Administration website, (www.eia.gov ). On the landing page, click on a product (e.g., natural gas or coal or petroleum) under the Sources and Uses tab, select Data tab, clickon EXPAND ALL. Find the daily prices for your commodity.
Here is an example for calculating standard deviation of daily futures returns on Excel. Prices are hypothetical.
Date Price Daily Return Daily Return Computation
5/1/2017 $50.00
5/2/2017 $49.67 -0.006622 Ln(49.67/50)
5/3/2017 $48.00 -0.034200 Ln(48.00/49.67)
5/4/2017 $48.75 0.015504
5/5/2017 $49.25 0.010204
5/6/2017 $48.75 -0.010204
5/7/2017 $49.00 0.005115
5/8/2017 $48.67 -0.006757
5/9/2017 $47.00 -0.034915
0.018801 STDEV (Excel function)
