Oman Crude Oil Futures Contract Essay

Custom Student Mr. Teacher ENG 1001-04 18 February 2017

Oman Crude Oil Futures Contract

1. Exchange: Dubai Mercantile Exchange
2. Trading Unit: 1,000 U.S. barrels (42,000 gallons)
3. Contract Value: The contract value shall be the Final Settlement Price multiplied by one thousand (1,000) multiplied by the number of Contracts to be delivered
4. Price Quotation: U.S. dollars and cents per barrel
5. Trading Symbol: OQD

6. Trading Hours : Electronic trading is open from 16:00 CST/CDT Sundays and from 17:00 CST/CDT Monday to Thursday and closes at 16:15 CST/CDT the next day, Monday to Friday. 7. Trading Months: The current year and the next five years will be listed. 8. Minimum Price Fluctuation: $0.01 (1) per barrel ($10.00 per contract)

9. Daily Settlement: A daily OSP settlement price will be published as at 16:30 Singapore time. This price represents the weighted average price of trades in the nearby Contract Month between 1625 and 1630 (Singapore). The DME will also publish an end of trading day settlement price for all listed Contract Months, determined as at 13:30 CST/CDT, which coincides with the end of the trading day for NYMEX Light Sweet Crude Oil.

This latter settlement price is used by the Clearing House to calculate daily variation margin on all open DME Contracts. 10. Final Settlement Price: The Final Settlement Price for a Contract Month shall be the OSP settlement price on the last Trading Day of the Contract Month. This price represents the weighted average price of trades in the nearby Contract Month between 1615 and 1630 Singapore Time. The Final Settlement Price will be used for purposes of margins for delivery of the Oil. 11. Last Trading Day

Trading in the nearby Contract Month shall cease on the last Trading Day of the second month preceding the Delivery Month. 12. Settlement Type :Physical

13. Delivery: F.O.B at the Loading Port, consistent with current terminal operations. Complete delivery rules and provisions are detailed in Chapter 10 of the rulebook. 14. Governing Law: English Law

The future price always converges towards the spot price. From the formula side, future quote F=S0 (1+(r+a)T), S0 is the spot quote, r is the interest rate for the future months, a is the cost of carrying. As it comes closer to the delivery day, T becomes smaller. On the other hand, the cost of storage and the interests of loans reduce as time goes by. Therefore, S0(r+a)T decreases. When it is the delivery day, which means that T equals to 0, S0(r+a)T =0, and the future quote F=S0.

On the other side, there are always different opinions for investors. For the crude oil futures contract, if an airline company wants to buy a large amount of crude oil at a fixed price in the future, it will currently buy crude oil futures to hedge the risk of fluctuation of oil price. Meanwhile, there may be many speculators who expect that the oil price in the future will go down, thus they will currently sell crude oil futures. Due to massive speculations in the futures market, the futures price and spot price become similar as time goes by.

For example, on 11/13/2012, I sell 10 contracts of 6-month crude oil futures, which will be delivered on 5/13/2013, and the spot price is 103.14 $/ barrel. Suppose the interest rate for 6 months is 2%, and cost of carrying is 1% of spot price, The nominal amount of 10 contracts is 10000 $. The price of the futures should be F=103.14(1+(1%+2%)*0.5)=104.69$. If the futures settlement price traded on the market today is 115$, the quantity that should be delivered is Q=10000/115=86.96 barrels. 1. I need to borrow 103.14* 86.96=8968.70$ for 6 months.

2. Buy 86.96 barrels crude oil. 3. Store the oil for 6 months, cost of storage is 8968.70*1%*0.5= 44.84$ 4. After 6 months, I deliver the oil at 115$/ barrel and receive 10000$. And I pay loan interest, which is 8968.70 (1+2%*0.5)=9058.38$ 5. The arbitrage is 10000-44.84-9058.38=896.77$, which is a gain.

In this case, I suppose that the futures price is higher than spot price, and speculators are willing to buy underlying asset, and sell futures contract in order to make profits. As a result, the spot price will go up while the futures price will go down. Finally, the futures price will converge to the spot price of underlying asset.

When the futures price is lower than spot price, and speculators will buy futures contract, and sell underlying asset in order to make profits. In this way, As a result, the spot price will go down while the futures price will go up, and finally the futures price will converge to the spot price of underlying asset.

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  • Type of paper: Thesis/Dissertation Chapter

  • Date: 18 February 2017

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