Financial Risk Management - Accounting Assignment Help

Assignment Task

QUESTION 1: HEDGING STRATEGY FOR PORTFOLIO 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 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 8000 or below 7000 by the end of May 2022.

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 between a times point before mid-August 2021 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. —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 May 2022 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%

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 7000 before the end of May 2022. As before, you should provide a detailed justification of the strategy. —15%

QUESTION 2: TRADING 40%

Commencing Monday 4th of April 2022, you will have two weeks to trade and hedge an option/stock portfolio. 

Trading activity will end on Friday 15th April 2022. 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.

Each of you will be assigned a particular stock, the list will be sent out to you via Moodle announcement one week before the trading starts and you must only trade in this stock and its relevant 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 you can share your trading ideas and strategies and how you will analyse the current portfolio performance.

It is strongly advised that you do not wait until week 10 to start working on this question.

 Some mock trading activities are expected to be conducted before Week 10 to allow you familiarise with the trading.

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 eac. 

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. 

In each strategy, you should describe your starting position, calculate the profit/loss on each date you implement/adjust your position, and your final position. Details of relevant calculations will also be expected. 

While your mark will be awarded based on the strategies that you have designed with your stock, and how detailed you have demonstrated it, extra marks will also be awarded on the following points :

 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

You 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?

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