Step (1) Statement of Objectives

· (1.A) State your objectives and expected learning outcomes of this derivatives trading simulation. Discuss your attempted role(s) as a derivatives trader, hedger, speculator, arbitrageur or some/all of the above.

· (1.B) Discuss your expected (target) rate of returns (%) to achieve during the period of derivatives trading simulation in FIN 430-20SS Fall 2022 semester. Discuss your own assumptions, risk aversion, sources of information, and any constraints (e.g., time, trading costs, margin, etc.) during the derivatives trading simulation.

Step (2) Investment Plan and Derivatives Portfolios

· (2.A) Discuss your investment plan and derivatives portfolios to achieve your objectives in Step (1). In order to achieve your objectives in Step (1), highlight specific examples of derivatives contracts (e.g., futures and options with different underlying assets) that are used to construct your derivatives portfolios. Discuss any unique features of your derivatives portfolios and trading strategies.

· (2.B) Perform at least thirty (30) different derivatives (or derivative-related) trades to apply and demonstrate different derivatives trading strategies.

· Important Instruction #1: During the simulation game (ended by the last trading day of Friday, Dec 2, 2022), you should have completed at least thirty (30) different derivatives (or derivative-related) trades.

· Important Instruction #2: Your portfolios should contain different types of derivatives contracts, including futures (on different underlying assets), options (on different underlying assets), etc. Important Note: Derivatives (futures and options) should be the primary trading strategies and instruments in your portfolio. In the StockTrak simulation, you can trade derivatives from different global markets, such as futures (on different underlying assets such as indices, currencies, commodities, interest rates, etc.), options (on different underlying assets such as equities, ETFs, etc.), and options on futures.¹ Your trading strategies should be backed by theoretical concepts, data, analyses, and analytical tools learned from this course – FIN 430 (see Step (3) next).

Step (3) Derivatives Trading Strategies, Analyses, and Applications

Construct and implement derivatives trading strategies based on your original insights, your own analyses and research, and your applications of derivatives theories and concepts. Your report should address all of the following questions and steps:

· (3.A) Demonstrate and discuss at least eight (8) different types of futures or options trading strategies. Your examples of derivative trading strategies may include (but are not limited to) the following:

· Long/Short Futures: long futures, short futures,

· Long/Short Options: long call, long put, short call, short put,

· Spread strategies: bull spread, bear spread,

· Combination strategies: straddle, strangle, butterfly spread,

· Hedging strategies: covered call, covered put, Delta hedging, etc.

· Other strategies: hedging using index futures, index arbitrage, synthetic options or futures, offsetting position or early exercise of options, cross-market trades involving spot and futures/options, etc.

· Different underlying assets of derivatives: the underlying assets of derivative contracts may include stocks, indices, VIX, commodities, interest rates, currencies, among others.

· (3.B) Demonstrate and discuss at least one (1) futures or options trading strategies based on derivatives theories and derivatives models (e.g., cost-of-carry models for futures, option pricing models for options, implied volatilities, dynamic hedging (e.g., Delta), etc.). Provide real data, quantitative analyses, and derivatives models to support your examples of derivatives trading strategies.

Important Instruction: Your report may include applications of option pricing models (such as the binomial option pricing models or the Black-Scholes-Merton option pricing model), implied volatility model, cost-of-carry models for futures, etc. Provide explicit discussions of all of your assumptions as clear as possible.

· (3.C) Demonstrate and discuss at least three (3) different types of futures or options trading strategies based on strategic/market timing. Explain the strategic timing of your trading strategies, e.g., based on market news, events, announcements, etc.

Important Instruction #1: Provide detailed information of the trading position, specific time/date (including the timing of the news/events and the timing of your futures/options trades), price, quantity, and other relevant information of your futures/options trades. Explain whether and how you have closed any futures or options position early in order to realize profits. Also, explain whether and how you have early exercised any options before expiration.

Important Instruction #2: Your trading strategies should incorporate your knowledge and findings of recent news/events in the U.S. and global financial markets. For example, recent events/news in various markets such as equities, indices, commodities, emerging derivatives markets, changes in regulations, corporate news and announcements, among others.

Step (4) Performance Evaluation 

Provide performance evaluations of your derivatives trading strategies and outcomes. Your report should address all of the following steps:

· (4.A) Provide performance evaluations of the trading outcomes and the overall performance of your derivatives portfolios. Discuss whether your derivatives trading strategies have achieved the objectives and expected learning outcomes in Step (1). Important Instruction: Include summary tables that contain information of: (a) your trading outcomes such as profits/losses from trading futures/options and profits from exercising options (if any);² and (b) overall performance of your derivatives portfolios such as overall profits/losses, rate of returns, Sharpe ratio, “Graph My Portfolio” in StockTrak simulation, etc.

· (4.B) Discuss your “best” (most effective or successful) derivatives trade and your “worst” (least effective or unsuccessful) derivatives trade during the simulation. Discuss any new insights and lessons learned from your “best” and “worst” examples.

Step (5) Conclusion and Learning Outcomes

Provide a concluding section, which summarizes your original findings and learning outcomes of this project and derivatives trading simulation.

In the concluding section, discuss two (2) major lessons (learning outcomes) from this simulation game such as new insights/ideas, concepts/theories, tools/models, and important lessons/skills you have acquired from this assignment and simulation.

B. INSTRUCTIONS ON DERIVATIVES TRADING SIMULATION:

To register into our simulation game, please go to the following link, which will automatically direct you to the registration page for our class code. https://www.stocktrak.com:443/members/register?session=FIN430-20SS-FALL22

You may also register from the home page of StockTrak (http://www.stocktrak.com/)

by clicking on the "students register here" button and inputting "FIN430-20SS-FALL22" as the class name.

To be familiar with StockTrak before trading begins, see "StockTrak Student User Guide" provided in the link below:

https://content.stocktrak.com/stocktrak-student-user-guide/

The following links are useful to become familiar with StockTrak (please log in first):

· FAQ: http://content.stocktrak.com/student-faq-technical-support/

· How to Trade: http://stocktrak.com/research/videocenter

Checklist and Important Instructions: Derivatives Trading Simulation

(I) The followings provide useful research materials for your derivatives trading simulation - see: (http://www.cboe.com/); (http://www.cboe.com/data/AnnualMarketStatistics.aspx).

(II) Make sure that you keep regular records all of your trading positions in your portfolio (important suggestion: keep regular records of all your trading positions at least once a week).

(III) Important information and instructions regarding option trading in simulation: note that there are two possibilities to make profits: Profits from option trading OR Profits from option exercising (BUT NOT BOTH). You may choose either:

OPTION (1) Profits from trading options “before expiration”. In this simulation, you can create profits from trading (buying/selling) options. Before expiration of the option contracts, you may make profits from selling existing option contracts that you already had.

OR

OPTION (2) Profits from options “at expiration”. Alternatively, you can hold your option contracts until expiration; the StockTrak simulation system will settle the contracts in cash.³ OR

OPTION (3) Profits from early exercising options “before expiration”. You can create profits from early exercise of options.

Ø See http://content.stocktrak.com/student-faq-technical-support/ and choose “Q: HOW DO I EXERCISE OPTIONS?”

Ø Second, to help your decision on early exercise of options, you may simulate profits of early exercising options by yourself. To simulate any profits from early exercising options, you can use the Excel model provided in Blackboard.