Options, Futures and Risk Management III
Options, Futures and Risk Management III
Group Assignment 1 (20%)
You are required to work in GROUPS of three members. Assignment groups (limited to three members) have been created under “people – assignment” tab in MyUni, i.e. Group 1 to 57. Please access this tab to self-enrol into any group number. Individual assignment as well as late submission would not be considered unless prior approval had been obtained. 11 September 2017. The link for the Turnitin Assignment tool has been created for you under the Assignment page on MyUni. Please indicate your group number when submitting your assignment, for example, ‘Group 57’. You will need to upload a Word version of your assignment to Turnitin. ONLY e-submissions will be accepted. For guidance on how to submit your assignment electronically via MyUni, please visit http://www.adelaide.edu.au/myuni/tutorials and click on the “Submit an Assignment” tutorial. Only one submission is to be made and in the name of the group leader. A group assignment submission form with student ids and signatures of ALL group members must be attached. Please also indicate all group member names and student ids on the first page of the assignment. You may obtain daily stock and options prices at http://www.afr.com/share-tables It is vital that you start collecting daily options and stock prices from today so that you have all the data you require for the entire two weeks period to be covered in this assignment.
Part A. Volatility arbitrage (13 marks)
Identify an option (in any market in the world) that you believe is mispriced. Illustrate and justify clearly why you think the instrument is mispriced.
Develop an arbitrage, delta-neutral strategy that will make money from the mispriced option. Specifically, detail the minimum costs of undertaking this strategy and pursuing it. You can use as much money as you like. Given that the strategy is theoretically risk free, you should not lose any money anyway!
Every week you are responsible for adjusting your delta-neutral portfolio. Make a record of all transactions and profit/loss of the strategy. You are required to show evidence of at least one adjustment (even if it was advantageous to close-out early – you can discuss this in your report).
Write a report detailing all your transactions and the rationale behind them and the final return you have made after two weeks. Evaluate the effectiveness of this strategy.
Part B. Alternative strategy (7 marks)
Using the same mispriced options identified in Part A and for the same two weeks period,
devise a strategy that will allow you to profit from the mispricing. You may hedge for other
risk factors or simply speculate for greater returns, the choice is yours as you deemed fit given
your assessment of the prevailing market conditions.
Make a record of all transactions and profit/loss of the strategy. Write a report detailing all
your transactions and the rationale behind them and the final return you have made after two
weeks. Evaluate the effectiveness of this strategy.
Compare this strategy to the delta-hedge strategy in part A. Discuss and conclude if one
approach is necessarily superior than the other, applying the underlying theory to prevailing
REPORT WRITING The report must document a list of transactions and dates they were
executed, evidenced by screenshot of market prices. The document must then discuss
everything from the process including such items as:
Transaction costs used for all transactions, with evidence that it is a realistic figure.
How the mispriced options were identified
How risk neutral portfolios were formed and why
When would have been the best time to close out positions
Justification for the strategy in Part B
Explanations and reasons for the performances
Discussion of how things could have been improved for both strategies in Part A and B
The above items will form the crux of what you will be assessed on, along with presentation
and concise writing skills. Your report length can be a MAXIMUM of 10 pages (size 12 font,
single spacing), including all discussion, graphs, tables and references.