The Enterprise Trading Game A resource for 14–19 year olds Standard game: Teachers’ notes

www.bp.com/bpes/tradinggame

Standard game: Teachers’ notes

Contents

1 Futures trading – About futures trading? – Playing the Standard game 4 Key information

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1. Standard game: Teachers’ notes

Futures trading

This extended version of the Enterprise Trading Game creates scope to further differentiate students’ learning and trading experience through ‘futures trading’. It is structured in the same way as the Entry-level game, but allows teams further flexibility with buying and selling oil futures contracts during each trading round for delivery at the end of the game.

1. About futures trading Futures trading involves the buying and selling of contracts on commodity markets. The buyers and sellers speculate whether the price of a commodity is going up or down in the future. Dozens of commodities, including orange juice, grains, livestock, precious metals and oil are traded every day. Traders are all trying to make a profit by buying a commodity at a low price and selling it at a higher price. Futures trading is mainly speculative ‘paper’ investing, i.e. it is rare for the investors to actually hold the physical commodity, just a piece of paper known as a ‘futures contract’. This is essentially an agreement to buy or sell a commodity at a fixed price (decided now) for delivery at a future point in time. For our simulation we will continue to focus on oil futures.

Oil futures: an explanation By agreeing in advance a price for oil, there are clear benefits to both buyers and sellers.

• Benefits for buyers: Large purchasers of oil include

airlines, distribution and transport networks and manufacturers. They are able to secure large volumes of oil at a known price and this gives them greater certainty to plan and operate their business. It can also help:

– with cash flow since a business knows what provisions it needs to make – a business to identify its financial needs and secure any additional investment or short-term cash facility.

• Benefits for suppliers: The benefits of oil futures for

those agreeing to supply oil are also significant.

–

Those who agree to supply oil are able to secure some protection from future price changes; they know in advance the price they will receive for their oil.

– The additional certainty that futures provide could help the oil company to secure long-term financing for future oil exploration and production. – There may also be an opportunity to earn a profit through speculation: if a supplier agrees to sell supplies at a future price, this price may turn out to be higher than the price they paid for the underlying commodity.

The buying and selling of futures contracts

2. Playing the Standard game Personnel • Controller: You will take on the role of Controller.

This involves facilitating the game, managing the presentation of News bulletins and ensuring teams keep to time limits.

• Assistant Controller: You will also need an additional

adult or responsible student to take on the role of Assistant Controller. This role involves managing the Master results spreadsheet, which is used to input the trades that each team makes and to calculate their final profit.

Resources • How to play (Flash video), or the

Introductory presentation (PPT)

• Standard game: Traders’ notes (PDF) 1 • News bulletins: Sets 1, 2 or 3 (PPTs) • Standard game: Master results spreadsheet (Excel)

Learning objectives The Standard game will provide students with the opportunity to understand:

• that markets do not always behave in predictable

or obvious ways

• that large and external shocks can affect global markets • the importance of business planning to meet

future commitments

• the importance of managing risk responsibly • the importance of accuracy and precision with

mathematical calculations

• the meaning and significance of oil futures • some key economic terms and principles • the types of enterprising qualities and values that can

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help them in their working lives.

Look out for future releases of additional News bulletin sets online at: www.bp.com/bpes/tradinggame

2. Standard game: Teachers’ notes

Futures trading cont. Team ‘Values’ Students may already be familiar with some of the Values Safety, Respect, Excellence, Courage and One Team which their company ethos was based on in the Entry-level game. This extended simulation has scope to further impress upon students the importance and relevance of these qualities in other walks of life outside of sport, such as the business world. Students will need to appreciate that the simulation is a simplified model of oil futures trading, but that the underpinning principles and Values do accurately mirror those in the ‘real world’.

Interpreting market

© iStockphoto

news

You might feel that these Values are even more important in this version of the game because of the complexity of the decisions that teams need to make. Students need to work collaboratively to discuss ‘What….if’ scenarios and to make intelligent inferences based on the evidence they have in front of them and any background business or economics knowledge they might have.

Playing the game Students work in teams of four to six members, and use the same roles as the Entry-level game: Chair, Market Analyst, Trader and Accountant. Getting started: 1 Select which set of News bulletins you are going to be playing with. Each set contains bulletins for three practice rounds and six trading rounds. 2 If teams have played the Entry-level game, they might want to evaluate how their team worked and alter roles for the Standard game. It would be helpful at this point to remind students of their commitment to the team ethos of Safety, Respect, Excellence, Courage and One Team.

Ask them to reflect on how they demonstrated these Values in the Entry-level game and what they might do differently this time to ensure their team can work together effectively. If this is their first time playing the Enterprise Trading Game, invite them to share their ideas about what these Values may look like in action.

3 The concept of futures can be introduced to students in the How to play film and, the explanation within the Traders’ pack.

Alternatively, use the Introductory presentation (PPT) to introduce the game.

4

Brief teams with the following information so they are clear on the objective of the game and the rules and regulations. This information is also included in the Traders’ pack.



Team brief

“Your mission is to work as an expert group of traders



within BP to help supply the UK with crude oil that could be converted into fuel for the future. Your team:

• will be buying and selling oil futures contracts to



make a profit



• will start with no trading position (no stock or funds) • will not need access to any oil or money until the



Your objective



To make more profit than your rival teams, whilst demonstrating the skills and values that can contribute towards success in business. This objective will be met by interpreting market news and accurately predicting the impact it will have on the price of oil.



To help maximise profit, you will need to:



date of your futures contract, which will be in six 2 months time (after round six ).

- agree to buy oil at the lowest price possible - agree to sell oil at the highest price possible.

2

If you are playing the practice rounds, this will be in three months’ time (after round three).



The challenge is interpret the news items to decide which way the market is going to move, and then buy and sell futures contracts as profitably as possible.”

3. Standard game: Teachers’ notes

Futures trading cont. Trading: 1 Before the game starts, teams need to make sure they have three copies of the Trading request forms for the practice rounds, and six copies for the trading rounds.

To help familiarise the teams with how the game works, start by playing the three practice rounds (included within the News bulletins). The game brief and rules stay the same, but teams will only trade over a three month period (three rounds). Any profit they make at the end of the practice rounds will not be carried over to the ‘real’ trading rounds – as they will start the game afresh.

2

Start each round by displaying the relevant news bulletin 3 onto a whiteboard or screen for four minutes . Each news bulletin contains a news flash and a price update (the price that oil futures are traded at for that round). Guidance points to help guide teams thinking are also included on 4 each slide. Additional information has been included in the notes section of each slide.



You might want to explore each scenario and discuss its contemporary relevance. Scope exists to do this because each round has been based on a ‘real-world’ event. Many of the news flashes have a ‘Further research’ element identified in the notes section of each slide. These elements include a link to a website that provides further information and context. This facility creates opportunities for further classroom discussion or extension work.

3

Once four minutes is up, ensure all teams have handed in a Trading request form. Remind them to update the accounts table on their Financial report (they do not need to hand this in). The Assistant Controller will need to input the data from the trading forms into the Master results spreadsheet.

4

Continue as above, until you reach the final round. Remind teams that by the end of the game their goal is to be ‘flat’. This means they need to have enough oil to satisfy all of their future contracts after the final 5 market price is revealed. They can either do this by:

• agreeing to sell oil in the last trading round to balance

5

Before revealing the final results, call a team meeting and ask teams to reflect on their progress. The meeting briefs in the Traders’ pack can be used to facilitate their reflection.

6

Display the results from the ‘Results’ sheet of the Master results spreadsheet. Before presenting the results, you may like to invite teams to share the profit they have calculated (at bottom of their Financial report), to see whether they have calculated their income accurately.



Game reflection/evaluation:



At the end of the game, you could ask teams to reflect on their performance as a team. For example:

a. How did they make their decisions to buy, sell or not trade? b. How successful were they with interpreting the news flashes?

c. Did their ‘market view’ reflect their position?



d. What was their approach towards risk?

e. How did the trading limits influence their decision-making? f. What happened, or what would happen if they didn’t manage risk responsibly? What would the consequences be in the real world? g. How did they take into consideration their ‘learnings’ from the Entry-level game and apply these in this version? h. What did the Values of Safety, Respect, Excellence, Courage and One Team mean to them in the context of this game? i. What key qualities do they think are required to perform well in this kind of environment?

What did they learn about:



a. the significance of futures trading



b. the predictability or unpredictability of the market

c. the types of factors that can affect the supply, demand and price of oil

d. the risk and reward of business decisions



e. the importance of business planning?

their position

• taking a risk and waiting until the final market price,

to balance their position. 6

However, teams must ensure they are not ‘short’ at the end of the last trading round. Otherwise, any shortfall of oil will automatically be bought at the final market price and deducted from their profit, along with a $5 per barrel fine. Careful record keeping and risk-management is essential.

3

You may decide to shorten or lengthen this time limit to suit the needs and ability level of your students. 4

The additional information includes background information, explanations and questions that you may choose to share with teams to support their understanding and decision-making further. 5 6

The final market price is revealed on the slide that follows the final news bulletin. See page 4 for an explanation of ‘short’ and ‘long’.

4. Standard game: Teachers’ notes

Key information







The game • • • •

Accurate

3 practice rounds First team meeting to discuss team performance 6 ‘real’ trading rounds Finalise accounts and hold Final team meeting

Record keeping

record keeping is crucial!

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• Trading request forms: In order to make a trade, teams must submit a Trading request form to the



Assistant Controller by the end of each trading round.



• Financial report: Teams need to keep track of their market position (the stock they have agreed to buy and sell)



Trading times











throughout the game.

• Each trading round will last for 4 minutes. Give teams a warning signal 30 seconds before the end of each round. • Trading request forms handed to the Assistant Controller outside this time will not be counted.

Trading rules • • • • • •

Teams will agree futures contracts to buy and sell (i.e. they can sell before they buy). By the end of the game, they must balance their sales and purchases. Teams will be trading in ‘lots’. One lot = 1,000 barrels. They must trade in increments of 10 lots, i.e 10 lots = 10,000 barrels. Their position must be between -100 and +100 lots during the game. They can also decide not to trade during a round.

Price ranges • Advisors estimate that crude oil may trade between $40–$140 per barrel.

Final round • Teams need to ensure they have bought enough oil by the end of the last trading round to meet



their sales contracts, otherwise they will be penalised for being short, and a final trade will automatically be made at the final market price to balance their position.



• If their position is long, they can choose whether to balance their position



Penalties





in the final trading round, or wait until the final market price to balance it.

• There are penalties if a team’s position is short at the end of the last

trading round. Penalties will be charged at $5 per barrel bought to balance their position.



1 lot = 1,000 barrels

Remind teams to: • • • •

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buy low, sell high use the news bulletins to inform their decisions always keep track of their position work together as a team.

Completed examples of these forms can be found in the Standard game: Traders’ pack.

Terminology Short: They have sold more oil than they have bought. Long: They have bought more oil than they have sold. Flat: Zero position. Sales balanced with purchases.