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Financial Risk Management

Coursework Assignment 2019/20 ASSESSMENT CRITERIA AND ISSUES

  • The submission date and time for this coursework assignment is 11:55 PM on 21 April 2020. 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 2500 and 3,000 words with quality being more important than quantity.
  • The submission should be anonymous, only student’s number should be revealed. No names appear in the submission.
  • 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:

  • –  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 system of referencing.

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.

If you have any concerns about plagiarism, you must discuss them with your lecturer or seminar tutor before submitting your final work for marking.

QUESTION 1: HEDGING STRATEGY 60%

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 cur- rently 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 2020.

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 dayFTSE100 index prices between a time points before mid August 2019 and on going 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. —15%
  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 2020 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.) —30%

  • As a separate exercise, devise a separate strategy that would protect the investor’s eq- uity component of her current £5 million portfolio should the FTSE 100 fall below 6800 before the end of April 2020.

As before, you should provide a detailed justification of the strategy. —15%

QUESTION 2: TRADING 40%

Option/stock portfolio. Trading activity will end on Friday March 24th (week 9). 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 class- mates 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 1000 and 1500 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=$35at$4.50each

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 Lecture 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.

  1. Volatility trading, do you believe that implied volatility is too low or too high? Assuming you do, there are many different ways to capitalise on your belief.
  2. Payoff construction. You believe that the stock will behave in a certain manner over a period of time. Construct an option/stock strategy to develop this idea.
  3. Relative cheapness/richness. You believe that one option/stock is cheap relative to another.

Don’t forget that the simulation exercise allows you to experiment and demonstrate with your theoretical understanding gained from the lecture series.

0.2 RISK LIMITS

Your must demonstrate an awareness of the risks associated with your trading portfolio. e.g, if a  geopolitical event occurs and volatilities jump by 10%, what are the implications for your portfolio?