Question

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Why did the May futures price of WTI Crude go negative when the May Brent Futures...

Why did the May futures price of WTI Crude go negative when the May Brent Futures price did not go negative?

Why does the delta of an in-the-money call option decrease with an increase in time to expiration?

What is the difference between an indicative price like LIBOR and a transaction price like the S&P 500 and why is it important?

can someone answer these questions for me.

Solutions

Expert Solution

Question 1

Why did the May futures price of WTI Crude go negative when the May Brent Futures price did not go negative?

Answer:

In an overnight trade in April, May futures for US crude oil WTI fell to minus $37.63 a barrel level, ahead of their Tuesday expiry. The trend was seen at a time when 90 per cent of the world is under lockdown and there is virtually no demand for crude oil. While US crude prices crashed, ICE's Brent crude were still trading around $25 a barrel level.

The sharp divergence was seen as WTI needs to be delivered physically at Cushing, Oklahoma (US), whereas for Brent contracts, deliveries can be done offshore at multiple locations. The storage constraints at Cushing, Okhalama, led to the dumping and unwinding of May contracts with other market participants moving to June contracts. Following Monday's crash, US crude for May delivery was trading at $1.10 a barrel on Tuesday morning.

Question 2

Why does the delta of an in-the-money call option decrease with an increase in time to expiration?

Answer:

As a general rule, in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock.

As expiration nears, the delta for in-the-money calls will approach 1, reflecting a one-to-one reaction to price changes in the stock. Delta for out-of the-money calls will approach 0 and won’t react at all to price changes in the stock. That’s because if they are held until expiration, calls will either be exercised and “become stock” or they will expire worthless and become nothing at all.

As expiration approaches, the delta for in-the-money puts will approach -1 and delta for out-of-the-money puts will approach 0. That’s because if puts are held until expiration, the owner will either exercise the options and sell stock or the put will expire worthless.

As an option gets further in-the-money, the probability it will be in-the-money at expiration increases as well. So the option's delta will increase. As an option gets further out-of-the-money, the probability it will be in-the-money at expiration decreases. So the option's delta will decrease.

Question 3

What is the difference between an indicative price like LIBOR and a transaction price like the S&P 500 and why is it important?

Answer:

Bid and offer price provided by a market maker for the purpose of evaluation or information, not as firm bid or offer price at which she is willing to trade. Also called Nominal Quotation. A preliminary estimate of the price at which a financial instrument might be created. Indicative prices are quoted to customers for planning or valuation purposes, but they do not form the basis for an actual transaction without further discussion. LIBOR is an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market. Although reference is often made to the LIBOR interest rate, there are actually a lot of different LIBOR interest rates.

The Transaction Price is the amount of consideration an entity expects to receive for the transfer of goods or services to the customer. The amount can be fixed, variable, or a combination of both. Transaction Price is allocated to the identified performance obligations in the contract.


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