Derivatives
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit
Derivatives (M)
Individual Assignment (30%)
o Submit your assignment electronically via the Turnitin Assignment tool by 9am Saturday, November 4. The link for the Turnitin Assignment tool has been created for you under the Assignment page on MyUni. You will need to upload your assignment in a Word document ONLY to Turnitin. Email submission will not be considered. This is your final exam and in line with examination rules, late submission will not be marked.
o Statement of Acknowledgement of Original Work
By submitting your assignment, you declare that all material in this assessment is your own work. You have also read the University's Academic Honesty Policy. Please be aware of policy and guidelines regarding plagiarism (see Course Outline for website link).
o Whilst you are encouraged to make use of the Refinitiv access available to you for your individual research, it is a requirement to use ONLY the data provided in the “ Derivatives (M) - data for assignment” file for this assignment.
Preamble
Over the last two years, the threat of inflation and burgeoning interest rates loom large in Australia and much of the world, presenting a different set of challenges, no less. Recent geo-political challenges have been front-of-mind exacerbating macro- economic risks, with heightened volatility seen in the markets. Considering the evolving macro-economic and geo-political challenges, the ability to hedge one’s investment has gained prominence.
In this assessment, you will devise hedging strategies using derivatives to hedge your stock, giving due regard to the prevailing market outlook.
A. Stock valuation (5 marks)
Drawing on the knowledge gained in your EVA course, employ relative valuation methods to value any ONE of the given stocks using the data provided in the Assignment Data file. Assume 5% as the risk-free rate and no dividend. Determine whether to go LONG or SHORT the chosen stock with a capital of $500,000.
Assessment criteria:
correct employment of relative valuation methodology,
cohesive arguments to long/short the stock giving due regard to both specific stock and broader market outlook.
B. Hedging with Futures (12 marks)
Based on the market value of your stock on October 2 and the market environment you determined in part A., implement a futures hedging strategy for the ensuing two weeks period. You are required to, at a minimum:
• implement the futures hedging strategy. Explain the strategy and its execution, and how that is appropriate to your analyses in Part A.
• tabulate and evaluate the performance of the strategy at the end of the hedge period in terms of risk and return and recommend potential improvement.
Assessment criteria:
appropriateness of the strategy vis-à-vis prevailing market environment
determination of hedge ratio
full details of transactions presented in a table with appropriate narrative of all relevant transactions that may occur in real world investment
effectiveness of the hedge and reasons why the hedge strategy worked/failed to work as you expect
discuss how the hedge can be improved taking into account the shortcomings you identified
C Alternative hedging strategy (10 marks)
It is often touted that options on futures can be just as effective as the underlying futures for hedging. Given your futures hedge position in part B, determine what corresponding positions in option on futures may be taken. Detail the strategy and its execution and explain how that is appropriate to your analyses in Part B. Defend why hedging with futures contracts is preferred to hedging with options on futures.
Assessment criteria:
explain options on futures hedge transactions needed
determine trade positions required
clarify appropriateness to part B objectives
merits/demerits of using futures vs options on futures for hedging in this particular instance
REPORT WRITING (3 marks).
Your report must document a complete discussion of the process outlined above, including full details of transactions executed. Transaction costs must bear evidence that it is a realistic figure. Good structure, presentation and concise writing skills are likewise important. Your report length must have a word count of 2,500 words (size 12 font, single spacing), including all discussion, graphs, tables and references.
2023-10-31