Derivatives and Risk Management
Derivatives and Risk Management
ASSESSMENT CRITERIA AND ISSUES
• The submission date and time for this coursework assignment is 11:55 PM on 08 May
2017. Failure to submit by this date is likely to result in severe penalties unless you
submit a relevant form. Submission of coursework must be electronically via Moodle.
• I expect your coursework assignment to be between 1500 and 2,500 words with quality
being more important than quantity.
• As should be obvious from the above, there is a requirement for you to research, collect,
present and analyse actual data. Sources of information must be included and
referenced in your discussion as well as the date the data was obtained.
• Points and/or arguments presented and made should be substantiated with data/evidence. I
am interested in your own views but it should be clear through the referencing system
whether they are personal or evidenced by the views/data of others
• A bibliography should be included using the Harvard system. This at least entails that
every reference included in the bibliography is referenced in the main body of the text
and that there are no references included in the bibliography that are not mentioned in
the main body.
• Clarity of expression – please pass through MS Word ’Spelling & Grammar’ or equivalent.
• Plagiarism means presenting another person’s work as your own. Some examples of it
are:
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– The inclusion in a student’s assignment of more than a single phrase from another
person’s work without the use of quotation marks and due acknowledgement of
the source.
– The summarising of another’s work by simply changing a few words or altering the
order of presentation, without proper acknowledgement.
– The use of the ideas or intellectual data of another person without acknowledgement
of the source or the submission or presentation of work as if it were the student
’s, when in fact they are substantially the ideas or intellectual data of another
person.
– Copying the work of another person (be it a co-student or any other source), including
figures, text, etc.
Students are rightly expected to draw upon other people’s ideas but in an appropriate
manner. Students will certainly use books and journals to assist with their
studies and in students may have access to other people’s work on computer disk
or over a computer network. When undertaking coursework assignments they may
legitimately make reference to publication made by others.
However, other people’s work must be used in a principled way, with due acknowledgement
of authorship. Students, in acknowledgement of the work of others must
use a recognised standard and for business students this is the Harvard sys-tem
of referencing.
For guidance on plagiarism refer to: https://my.lsbu.ac.uk/assets/documents/
library/h2g-library-4.pdf
For guidance on the Harvard system of referencing: https://my.lsbu.ac.uk/
assets/documents/library/h2g-library-30.pdf
The consequences of plagiarism are extremely serious. This should be borne in
mind at all times and especially when students are completing their assignments.
In cases of plagiarism and other forms of cheating, University regulations will be
strictly applied. Penalties may include failure in the module, without the right to be
re-assessed or even termination of studies.
QUESTION 1: HEDGING STRATEGY 50%
A wealthy UK investor has a well-diversified portfolio of UK equities (60%), international equities
(20%), UK government bonds (10%) and cash deposit (10%) and the portfolio is currently
worth £5 million. He has been tracking the level of the FTSE100 index for some time
and believes that the FTSE100 index is unlikely to be above 7800 or below 6800 by the end
of April 2017.
Assume this investor has asked for your advice with regard to the use of FTSE100 futures
and/or options strategies that will make a profit should his view of the market be correct. You
should be aware, however, that although your client is a high net worth individual, he
absolutely hates losing money. Any strategies you suggest, therefore, must not lose more
than £200,000 under any circumstances.
1. Collect relevant end of day FTSE 100 index prices before mid August 2016 (and ongoing as
relevant), stating the date obtained. Research and report the performance of the UK stock
market, with extra marks awarded for good quantitative analysis provided. —10%
2. Collect the relevant futures and/or option prices, using these prices obtained to construct
THREE different trading strategies that would be expected to yield a profit should
the investor’s view of the future performance of the FTSE100 be correct within this end
of April 2017 time span.
You should provide a detailed justification of each strategy, and this is expected to include
a theoretical pricing analysis of the futures/options chosen, as well as a scenario
analysis to confirm that the strategy cannot lose more than £200,000.
(In this exercise you are creating a new investment strategy, so you should ignore the
risk on the existing £5 million portfolio.) —40%
3. As a separate exercise, devise a separate strategy that would protect the investor’s equity
component of her current £5 million portfolio should the FTSE 100 fall below 6800
before the end of April 2016.
As before, you should provide a detailed justification of the strategy. —15%
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QUESTION 2: TRADING 50%
Commencing Monday 20th of April (week 8)1
, you will have two weeks to trade and hedge an
option/stock portfolio. Trading activity will end on Friday March 31st (week 10). In this activity,
you should devise trading strategies, actively manage these strategies and finally you should
analyse the performance of your strategy. The objective of your strategies is to make money
but the grade awarded will be based on
• A logical, coherent strategy designed to make money
• A demonstration of lecture theory in a practical setting showing your understanding.
• An analysis of the strategy performance apropos of the original intention
You will be assigned a particular stock as per the list at the end of this document, and you
must only trade in this stock and its derivatives.
Although this is an individual assignment, you are allowed to meet with your fellow classmates
to discuss your ideas. These meetings should commence ASAP and should discuss
trading strategies and should analyse the current portfolio performance.
A report of between 800 and 1200 words must be submitted by the assignment deadline.
Trading activities must be included in the report’s Appendix. e.g., after each trade, you should
have a paragraph contains the following,
• The date of the trading
• All of that days’ activities.
– E.g. Bought 2000 shares of YHOO at $34.10
– Sold 200 YHOO Dec Call Options, Strike = $35 at $4.50 each
You should have between two and three trading strategies. These should differ from each
other in order to cover various aspects of stock/option performance characteristics. The
strategies should also be viewed as part of an overall portfolio in terms of risk and market
strategy.
0.1 TRADING IDEAS
Your objective is to make money. Your final P&L will not impact on your grade but it should
provide you with an indication of your performance. Here are some tips and ideas to get you
started but theses are just some of the possible avenues that you can explore. The Lec-ture
notes and the recommended readings will provide you with all of the relevant literature.
Remember, your grade will be awarded on strategy rationale, the implementation of that
rationale and on your subsequent examination of your experience.
