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42 views

Assignment_2024

Uploaded by

Aurora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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125.

781 Advanced Financial Risk Management

Semester 2, 2024

Due: 5pm 11th October 2024

Assignment Part I: Hedging Portfolio Risk with Index Futures

Below, please find contract specification and prices for E-MINI S&P500 index as of
19/August/2024 (quotes obtained from
https://www.cmegroup.com/markets/equities/sp/e-mini-sandp500.quotes.html) .
Underlying: E-MINI S&P500 Index
Contract size $50 x S&P500 index

Spot 5554.25
SEP 2024 5578.25
DEC 2024 5638.00
MAR 2025 5692.25
JUN 2025 5737.50
SEP 2025 5781.25
DEC 2025 5824.75
MAR 2026 5863.00
JUN 2026 5903.25
SEP 2026 5948.75
DEC 2026 5972.25
MAR 2027 6012.25
JUN 2027 6057.25
SEP 2027 6103.25

Tasks:

Pick 5 American companies of your choice (the only requirement – they have to be in
S&P500 index).
Assume you have US$50,000,000 invested in a portfolio equally weighted in these 5 stocks.
You plan to liquidate your portfolio in May of 2026, but you do not want to be exposed to
the market risk before liquidating.
Suggest an optimal hedging strategy for your investment. Discuss its advantages and
limitations.
Assignment Part II: Option pricing and option trading strategies

Pick one stock from the ASX50 list (stock code is available here:
https://www.asx50list.com/) and search for its options in
https://www.asx.com.au/marginestimator/. You can choose any pair of European call and
put options with the underlying asset as the stock you picked, whose expiry date are in
December 2024. As an example, you can see information like this (please note the date
that you extract the information):

Tasks:

1. Use the Black-Scholes Option Pricing model to verify the theoretical price of the
options as seen in the “Theo Price” column. Verify the Put-Call parity relationship.
2. Use the information of the “volatility” column to set up the two-step Binomial Tree
and work out the option prices using the Binomial Option Pricing Model.
3. Consider that you, as a trader, are predicting about the future scenarios in the stock
market in December 2024. Design an appropriate trading strategy using more than
one option in each of the following scenarios that you expect, and analyse their
payoffs by underlying stock prices (note that you can choose available options other
than using in task 1 and 2):
a. The stock you picked will increase (bull market).
b. The volatility of the stock you picked will be small.
c. The stock you picked will experience a large move, but you do not know in
which direction the move will be.
d. The stock you picked will experience a large move, and you bet that an increase
in the stock price will be more likely than a decrease.
Note:

• This is a group assignment. Each group can have up to 4 students. All group members
are responsible for all aspects of the assignment and receive the same mark.
• Each group needs to submit a report. The report has to be a Word document. While
you can do your calculation in Excel Spreadsheets, the results/analysis have to be
summarised and presented in the report in the forms of Tables, Diagrams, Figures,
etc.. And the Excel Spreadsheets should also be submitted together with your report.
• Clearly explain the rationale of your choices for trading strategies and provide
description on how the trading strategies work depending on the scenarios of the
stock prices.
• The assignment contributes 30% towards your total grade, with each part contributing
15%.
• This assignment requires plagiarism and AI checking with Turnitin.

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