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Chevron - Derivatives and Financial Engineering Project

Chevron - Derivatives and Financial Engineering Project
TAGSB - Jordan
Hadeel Mango

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    Chevron - Derivatives and Financial Engineering Project Chevron - Derivatives and Financial Engineering Project Document Transcript

    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOTAG Graduate School of Business“Derivatives and Financial Engineering”Dr. Taher Al-AssafPrepared By: Hadeel MangoStudent Number: 2009408053 1
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGO TABLE OF CONTENTS 1. COMPANY PROFILE ...................................................................... 1 2. CHEVRON CORPORATION OPTIONS ............................................. 4 3. RISK FREE CALCULATION .............................................................. 5 4. HISTORICAL VOLATILITY ............................................................... 6 5. THEORITICAL STOCK PRICES ......................................................... 7 6. IMPLIED VOLATILITY ..................................................................... 9 7. OPTION STRATIGIES ................................................................... 10 8. FUTUERS ..................................................................................... 17 2
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGO 1. Company profileBusinessChevron is one of the worlds leading integrated energy companies, with subsidiaries thatconduct business worldwide. Our success is driven by our people and their unrelenting focuson delivering results the right way—by operating responsibly, executing with excellence,applying innovative technologies and capturing new opportunities for profitable growth. Weare involved in virtually every facet of the energy industry. We explore for, produce andtransport crude oil and natural gas; refine, market and distribute transportation fuels andlubricants; manufacture and sell petrochemical products; generate power and producegeothermal energy; provide energy efficiency solutions; and develop the energy resources ofthe future, including biofuels.Businesses work in concert to provide the energy that drives human progress. ExploreChevron’s companies to learn how we use global resources, determination and ingenuity tomeet today’s complex energy challenges.  Chevron was the first major integrated energy company to offer domestic partner benefits to our employees.  In 2010, for the seventh consecutive year, Chevron was given a perfect score on the Corporate Equality Index by the Human Rights Campaign and was recognized as one of the Best Places to Work for Lesbian, Gay, Bisexual and Transgender Equality. The Corporate Equality Index rates nearly 600 businesses on their policies, practices and diversity efforts relating to lesbian, gay, bisexual and transgender employees, consumers and investors.  In 2010, DiversityBusiness.com named Chevron one of Americas Top Organizations for Multicultural Business Opportunities.  In 2010 and for the eighth consecutive year, the Womens Business Enterprise National Council honored Chevron as a Top Corporation for providing opportunities to women entrepreneurs—a tribute to our Supplier Diversity/Small Business program.  Profiles in Diversity Journal presented Chevron with its 2010 Diversity Leader Award for communicating the companys commitment to diversity and for sharing diversity best practices.Company RootsOur company has a long, robust history, which began when a group of explorers andmerchants established the Pacific Coast Oil Co. on Sept. 10, 1879. Since then, our companysname has changed more than once, but weve always retained our founders spirit, grit,innovation and perseverance. 3
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOOver the years, we joined with other companies, each with their own history, strengths andcharacter. Weve grown from a San Francisco-based company with a five-state market in theWestern United States to a major corporation whose subsidiaries conduct businessworldwide. Throughout, weve retained our fundamental purpose: to provide the energypeople need to fuel human progress.We trace our beginnings to an 1879 oil discovery at Pico Canyon, north of Los Angeles, whichled to the formation of the Pacific Coast Oil Co. That company later became Standard Oil Co.of California and, subsequently, Chevron. We took on the name Chevron when we acquiredGulf Oil Corp. in 1984, nearly doubling our worldwide proved oil and gas reserves. Ourmerger with Gulf was at that time the largest in U.S. history.Another major branch of the family tree is The Texas Fuel Company, formed in Beaumont,Texas, in 1901. It later became known as The Texas Company and eventually Texaco. In2001, our two companies merged. The acquisition of Unocal Corporation in 2005strengthened Chevrons position as an energy industry leader, increasing our crude oil andnatural gas assets around the world.Global ScopeOur diverse and highly skilled global workforce consists of approximately 58,000 employeesand about 4,000 service station employees.In 2010, Chevron produced 2.763 million barrels of net oil-equivalent per day, 2 percenthigher than in 2009. About 75 percent of that volume occurred outside the United States.Chevron had a global refining capacity of more than 2 million barrels of oil per day at theend of 2010.Our marketing network supports retail outlets on six continents. And we have invested in 13power-generating facilities in the United States and Asia.Technology and Emerging EnergyTechnology is propelling our growth. Were focusing on technologies that improve ourchances of finding, developing and producing crude oil and natural gas.We also are investing in the development of emerging energy technologies, such as findingbetter ways to make nonfood-based biofuels, integrating advanced solar technology into ouroperations and expanding our renewable energy resources. 4
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOEnvironment and SafetyAs a company and as individuals, we take great pride in contributing to the communitieswhere we live and work.We also care about the environment and are proud of the many ways in which ouremployees work to safeguard it.Our persistent efforts to improve on our safe work environment continue to pay off. In 2010,Chevron achieved our safest year ever, setting new safety records in the days-away-from-work performance in both Upstream and Downstream operations.Our WorkWe recognize that the world needs all the energy we can develop, in every potential form.Thats why our employees work daily to find newer, cleaner ways to power the world.Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining,power generation, and energy operations worldwide. It operates in two segments, Upstreamand Downstream. The Upstream segment involves in the exploration, development, andproduction of crude oil and natural gas; processing, liquefaction, transportation, andregasification associated with liquefied natural gas; transportation of crude oil throughpipelines; and transportation, storage, and marketing of natural gas, as well as holds interestin a gas-to-liquids project. The Downstream segment engages in the refining of crude oil intopetroleum products; marketing of crude oil and refined products primarily under theChevron, Texaco, and Caltex brand names; transportation of crude oil and refined productsby pipeline, marine vessel, motor equipment, and rail car; and manufacture and marketingof commodity petrochemicals, plastics for industrial uses, and fuel and lubricant additives. Italso produces and markets coal and molybdenum; and holds interests in 13 power assetswith a total operating capacity of approximately 3,100 megawatts, as well as involves in cashmanagement and debt financing activities, insurance operations, real estate activities,energy services, and alternative fuels and technology business. Chevron Corporation has ajoint venture agreement with China National Petroleum Corporation. The company wasformerly known as ChevronTexaco Corp. and changed its name to Chevron Corporation inMay 2005. Chevron Corporation was founded in 1879 and is based in San Ramon, California.DetailsIndex Membership: Dow Jones Composite Dow IndustrialsSector: Basic MaterialsIndustry: Major Integrated Oil & GasFull Time Employees: 62,000 5
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGO 2. Chevron Corporation Options Chevron Corporation Common Stock (CVX)-NYSEChevron Corporation has various figures of calls and puts options with different expiationand exercise prices; total options observed were totaling 148 calls and puts options, 38 ofthese options were LEAPS with more than 1 year expiration.The table below is a sample of Chevron Corporation options with different expiration andexercise pricesExpiration date 16-Dec 12-Jan 12-Mar 12-Jun 13-Jan 14-JanExercise Price (47.5-145) (35-155) (47.5-150) (47.5-145) (47.5-155) (80-130)number of 25 35 26 24 27 11optionsOptions cycleStock options can belong to one of three expiration cycles. In the first cycle, the JAJO cycle,the expiration months are the first month of each quarter - January, April, July, and October.The second cycle, the FMAN cycle, consists of expiration months February, May, August andNovember. The expiration months for the third cycle, the MJSD cycle, are March, June,September and December.Chevron Corporation options belongs to January Cycle – (January 2012, February 2012,March 2012, June 2012).Chevron Corporation has LEAPS listed for trading which expire in January.Odd exercise prices Generally the strike price of options formulated as the following  If the stock price is higher than $100, the strike price is in the intervals of 10, i.e.: $100, $110, $120...etc  If the stock price ranges from $25 to $100, it is in the intervals of 5, i.e. $25, $30..., $50, $55, $60..., $90, $95. 6
    • DERIVATIVES PROJECT CHEVRON CORPORATION - CVX HADEEL MANGO  If the stock price is lower than $25, it is in the intervals of 2.5, i.e. $17.7, $20 and $22.5. Data observed from CBOE for Chevron Corporation shows that the exercise price has two different intervals which is 5 or 2.5 for examples in the intervals of 5 the price trends as 35$, 40$, 45$ and in the intervals of 2.5 the price trends as 92.5$, 95$, 97$ Moreover Chevron Corporation has no odd prices . 3. Risk free rate calculation In reference to the Wall Street website the treasury bills bid and ask rates was as follows:maturity Bid ask Average Remaining Return Compounded period Return16 March 0.025 0.005 0.015 (71/360) 0.00003 0.000154242012 To find an estimate of the T-bills rate which expired in March 16, we do the following:  Calculate the average of the bid and ask discounts, (0.025 + 0.005)/2 = 0.015.  Then calculate the discount from par value, 0.015 (71/360) = 0.0029583 using the fact that the option has 75 days until maturity. Thus, the price is 100 - 0.0029583 = 99.9970  Yield on our T-bills equals, (100-99.9969)/99.9969 =0.00003  The compounded return for a full year would be, (1.00003)^365/75 – 1 = .00015424. Thus we would use 0.00015424 percent as our proxy for the risk free rate for the option expiring on 16/03/2012. 4. Historical volatility Historical volatility calculation is based on the company’s historical closing stock price which is extracted from Yahoo Finance for the following period 17/11/2011 to 0/01/2012.First we take a sample of returns on the stock over the past period. We convert these returns into continuously compounded returns. Then, we compute the standard deviation of the continuously compounded returns. 7
    • DERIVATIVES PROJECT CHEVRON CORPORATION - CVX HADEEL MANGO Stock return calculation is based on the adjusted daily closing prices in order to incorporate the distributed dividend. The below table shows the company stock historical prices, returns and the continuously compounded returns: Continuously Simple Rate of Date Open High Low Close Volume Adj Close Compounded Return Rate of Return17/11/2011 100.75 102.13 98.75 100.08 11794300 100.08 NA NA18/11/2011 100.52 101.5 97.52 97.88 13668700 97.88 -2.20% -2.22%21/11/2011 96.92 96.94 94.45 95.66 15021100 95.66 -2.27% -2.29%22/11/2011 95.68 97.25 95 96.42 8939500 96.42 0.79% 0.79%23/11/2011 95.42 95.58 93.75 93.75 11665200 93.75 -2.77% -2.81%25/11/2011 94.03 94.45 92.29 92.29 5257300 92.29 -1.56% -1.57%28/11/2011 96.03 96.35 95 95.77 8403100 95.77 3.77% 3.70%29/11/2011 95.96 98.05 95.75 97.39 8845100 97.39 1.69% 1.68%30/11/2011 100.5 102.82 100.11 102.82 13373200 102.82 5.58% 5.43%01/12/2011 102.82 103 100.96 101.83 7007200 101.83 -0.96% -0.97%02/12/2011 103.04 103.19 101.5 101.69 6638100 101.69 -0.14% -0.14%05/12/2011 103.58 104 102.04 102.82 6121800 102.82 1.11% 1.11%06/12/2011 103.1 104.73 102.84 104.36 7445000 104.36 1.50% 1.49%07/12/2011 104.22 105.74 103.97 104.52 10323300 104.52 0.15% 0.15%08/12/2011 104 104.8 101.95 102.25 7720100 102.25 -2.17% -2.20%09/12/2011 102.74 104.5 102.71 104.25 6624100 104.25 1.96% 1.94%12/12/2011 104.02 104.23 101.5 103.07 7595800 103.07 -1.13% -1.14%13/12/2011 104.22 105.89 103.1 103.62 8990000 103.62 0.53% 0.53%14/12/2011 102.75 104.02 99.51 100.53 15512100 100.53 -2.98% -3.03%15/12/2011 101.23 101.6 99.32 99.67 9667000 99.67 -0.86% -0.86%16/12/2011 100.32 100.86 99.59 100.86 14709700 100.86 1.19% 1.19%19/12/2011 101.16 101.33 99.5 99.72 5977400 99.72 -1.13% -1.14%20/12/2011 101.94 103.85 101.78 103.67 7278600 103.67 3.96% 3.88%21/12/2011 103.68 105.53 103.55 105.43 8156600 105.43 1.70% 1.68%22/12/2011 105.51 106.58 105.06 106.31 7483800 106.31 0.83% 0.83%23/12/2011 106.63 107.61 106.1 107.5 3779400 107.5 1.12% 1.11%27/12/2011 107.26 108.49 107.26 107.98 4136200 107.98 0.45% 0.45%28/12/2011 107.86 108.16 105.88 105.96 5307900 105.96 -1.87% -1.89%29/12/2011 106.38 107.56 106.32 107.47 4468500 107.47 1.43% 1.42%30/12/2011 106.79 107.5 106.18 106.4 5009400 106.4 -1.00% -1.00%03/01/2012 108.74 110.99 108.73 110.37 11518700 110.37 3.73% 3.66%04/01/2012 109.83 110.37 109.2 110.18 8019100 110.18 -0.17% -0.17%05/01/2012 109.39 109.54 107.97 109.1 7184900 109.1 -0.98% -0.99% Standard Diviation 2.07% Annualized SD 25.02% 8
    • DERIVATIVES PROJECT CHEVRON CORPORATION - CVX HADEEL MANGO 5. Theoretical Stock Prices As of January 05, 2012, Chevron Corporation stock price was $109.10, the table below shows three options which has been selected in order to illustrate the required three states: in the money, at the money and out of the money The chosen exercise prices as follows, $ 105, $110, and$ 115. For the $105 price it’s considered in the money for the call option and out of the money for the put option. $110 considered out of the money for both call and put options, and $110 considered out of the money for both call and put options. Call Put Call Put MARCH - 2012 MARCH - 2012 MARCH - 2012 MARCH - 2012exercise price Theoretical Price Actual Price 100 11.27 2.69 10.72 2.22 111 5.59 7.08 3.50 5.80 120 2.37 13.88 0.60 12.45 Comparing theoretical prices to actual prices we found that they are overpriced in accordance to actual option prices at exercise date March 16th 2012. In reference to black and Scholes formula, and the binomial model based on 1000 step the calculated theoretical price and the calculation process for each of the above mentioned exercise prices represented below: 9
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGO 11
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGO 6. Implied Volatility 11
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOComparing the volatility to the implied volatilities calculated by Black - Scholes - Mertonimplied volatility function for the selected exercise prices, it is found that the impliedvolatilities are near the range of 25% with a normally distributed observations that havevariances between ( -5, +5) and they were as follow:Exercise Price Call Implied Volatility Put Implied Volatility100 25.57% 30.60%110 20.40% 28.15%120 18.68% 27.30% 7. Options Strategies 12
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOIn Order to Investors to keep their investments save and have the minimum losses, theycan hedge themselves by using different strategies . by Using option TOOL box .We willapplied strategies on Alcoa’s options.Investors used to use different options strategies in order to hedge their positionsand maintain minimum risk.Some of these strategies are bull spread, bear spread, collars, butterfly, calendar,and straddle.Assuming the value of the stock was 109.1, volatility 25, and risk free rate =1 (as it is thelowest number on tool box).Bull Spread Strategy: 13
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOThe Bull spread strategy consist of the purchase of the option with the lowerexercise price and the sale of option with higher exercise price, the chosenexercise price were $100 and $115 with MARCH Expiration. March MaturityBull Spreads long call with $100 exercise price short call with $115 exercise priceThe figure represented above illustrates the bull spread strategy for Chevron CorporationMarch $100 and $115 calls with premiums of $10.72 and $1.45 the red line is the longposition of March $100.Bear Spread Strategy: 14
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOThe bear spread strategy consists of purchase or (long) of the high exercise price put andsell or (short) of the low exercise price put, the chosen exercise price were $100 and $115with March expiration. March MaturityBear Spreads long Put with $115 exercise price short Put with $100 exercise priceThe above figure illustrates the Put Bear Spread for Chevron Corporation March $115 and$100 puts with premiums of $2.22 and $8.80, respectively the yellow line is long position inthe $115 put.Collars Strategy: 15
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOCollars is a strategy in which the holder of position in a stock buys a put with an exerciseprice lower than the current stock price and sells a call with an exercise price higher thanthe current stock price . The call premium is intended to reduce the cost of the putpremium .the call premium is often set to make the call premium completely offset theput premium as follows: March Maturity Collars long Put with $100 exercise price short call with $115 exercise priceThe above figure illustrates the collar for Chevron Corporation March $100/$115 where thetrader bought the put option with exercise price of $100 and premium of $2.22 and sold acall option with exercise price of $115 and premium of $1.54.Butterfly Spreads 16
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOA butterfly spread, sometimes called a sandwich spread, is a combination of a bull spreadand a bear spread. However, this transaction involves three exercise prices: X1, X2 and X3where X2 is half way between X1 and X3. Hence, we construct a call bull spread bypurchasing the call with the low exercise price X1 and writing the call with the middleexercise price X2. Then we also construct a call bear spread by purchasing the call with highexercise price X3 and writing the call with the middle exercise price X2. This strategy isfollowed if our expectation on the stock price will be stable with no changes in price.The table below represents the chosen exercise prices and the butterfly strategy. March Maturity Butterfly long call with $100 exercise price short two calls with $110 exercise price Long call with $115 exercise priceThe below figure illustrate the butterfly spread for the March $100, $110 and $115 callswith premium of $10.72, $3.50 and $1.54. The maximum profit is obtained when the stockprice at expiration is at the middle exercise price. Generally the butterfly spread strategyassumes that the stock price will fluctuate very little. 17
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOCalendar Spreads strategyA calendar spread, also known as a time spread or horizontal spread, involves the purchaseof an option with one expiration date and the sale of another identical option with adifferent expiration date. Exercise price of $110 Calendar long call with March expiration short call with June expirationThe profitability of the calendar spread is determined by the difference in the option timevalues, the longer term call will have more time value. 18
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGOStraddle StrategyA straddle is the purchase of a call and a put that have the same exercise price andexpiration date. By holding both a call and a put, the trader can capitalize on stock pricemovements in either direction. This strategy is followed if our expectation on the stock pricewill not to be stable and it will changes either by increasing or decreasing mode. Exercise price of $110 Straddle long call with March expiration long put with March expirationThe figure illustrates the straddle for Chevron Corporation March $110 options. As notedthe straddle is designed to capitalize on high stock price volatility in order to create aprofit the price must move substantially in either direction. 19
    • DERIVATIVES PROJECTCHEVRON CORPORATION - CVXHADEEL MANGO 8. Comparison of the Futures Price of the stock with Theoretical Fair ValueChevron Corporation has four expiration periods for their future contracts, which areJanuary, February, March and June. In order to calculate the theoretical fair value forMarch future contract first we need to calculate the risk free rate for March treasury billsas previously obtained from the Wall Street Journal and the following are March treasurybills calculations:Risk Free Calculation Maturity Bid Asked Change Asked yield22nd March 2012 0.020 0.010 -0.0050 0.010029th March 2012 0.015 0.005 0.0000 0.0050(Bid+ Ask)/2 0.015A*(71/360) 0.0029583100-B 99.9970(100-C)/C 0.00003((1+D)^(365/71))-1 0.00015424  Future theoretical fair priceFrom the table above the observed risk free rate was 0.00015423, since the price ofChevron Corporation stock today 05/01/2012 is $109.1, the calculated theoretical fairfuture price for March is 108.3068 which is almost equal to the stock price, and thecalculation is shown below:F = P ∙ (1 + r) – DivF= $109.1 *(1+0.00015424) – 0.8100F= 108.3068Comparing theoretical price with the market price, we will found that the theoretical price is lowerthan the market price by 0.1932 based on the above information it is recommend to sell the stock. 21