Risk Management and Derivatives AFIN806 Final Project
The project report is to be submitted in electronic form to Turnitin which will be made available as a
link in iLearn. The final submission is due no later than 11:59 pm AEST on 12 November 2019.
No extensions will be granted. There will be a deduction of 10% of the total available marks made
from the total awarded mark for each 24-hour period or part thereof that the submission is late (for
example, 25 hours late in submission – 20% penalty). This penalty does not apply for cases in which
an application for special consideration is made and approved. No submission will be accepted after
solutions have been posted.
Please name your file as
“L[LectureStreamNo.][StudentID][Surname]_[FirstName]”.
For example, if you are enrolled in Charles’ lecture with student ID of 12345678 and name of AAA
BBB. You should name your file as “L1_12345678_BBB_AAA”. For students enrolled in Georgina’s
lecture stream, your lecture stream number is 2.
You are required to submit the following files via the corresponding submission links on iLearn:
- Final Project Report;
- Final Project Spreadsheet.
Question 1 (9 marks):
Today is 13 December 2018. A fund manager sells a one-year put option written on the ASX200
Price index. The current value of the ASX200 is 5661.61. Assume the risk-free interest rate is 6%
p.a., the dividend yield of the ASX200 is 2% p.a., and the volatility of the index is 15% p.a. The strike
price for the put option is 5800.
a) The manager would like to hedge and rebalance his portfolio on daily basis by taking positions
on the underlying asset and/or one-year call options written on the same underlying with the
strike price being 5700. Based on the historical prices of the ASX200 Price index from 13
December 2018 to 31 December 2018, calculate the next 10 days’ daily profits of his portfolio by
considering the following hedging strategy:
i) Delta-hedging only;
ii) Delta- and gamma-hedging.
You need to explain carefully how the profits are calculated by specifying any positions in the
underlying asset and/or options. [5 marks]
b) Compare and evaluate the hedging strategies in part a. Which strategy would you suggest the
manager to choose, and why? What are the potential practical issues related to the strategy that
you suggested? [4 marks]
Question 2 (5 marks):
a) Make one graph including the following four lines:
i) The 30-day rolling standard deviation of the ASX200 daily continuously compounded return;
ii) The daily volatility estimate of the ASX200 daily continuously compounded return using the
EWMA model with lamda being 0.8;
iii) The daily volatility estimate of the ASX200 daily continuously compounded return using the
EWMA model with lamda being 0.94;
iv) The Australian VIX.
Your graph should cover the period from 2 January 2018 to 31 December 2018. Include a proper
legend, chart title, and axis titles in your graph. [3 marks]
b) Compare and comment on your plots for a.ii) and a.iii). [1 mark]
c) Provide an interpretation of what the VIX number means. Be as specific as possible. [1 mark]
Question 3 (6 marks):
You manage a well-diversified portfolio that mirrors the ASX200 Price Index and is currently worth
$100 million. You would like to carry out a stress testing for your portfolio by estimating how a
company’s portfolio would have performed under some of the most extreme market moves. You
would like to focus your stress testing on the period from 1 July 2007 to 30 June 2009.
a) Find the 99.5% non-parametric daily stressed value-at-risk (VaR) and the 99.5% nonparametric daily stressed expected shortfall (ES) of continuously compounded daily returns on
the ASX200 Price Index. The non-parametric VaR/ES is also called the cut-off or percentile
method of finding the VaR/ES. [3 mark]
b) What are the advantages and disadvantages of using stressed VaR in determining capital
reserve. [3 marks]
Administrative requirements
This report is worth 20% of the course’s marks.
The limit is 4 pages using font size of 12, 1.5 line spacing and default margins, just like this page.
You need to include a signed cover sheet in your report. The cover sheet template has been
attached at the end of this document.
Supporting images, graphs, tables and so on should be placed in-text next to the paragraph where
the figure is discussed. All source documents/data must be properly acknowledged in footnotes.
There’s no need for an appendix and if you have one it’s not likely to be marked.
You must use APA or Harvard referencing styles. Bibliographies are not included in the page count.
Items listed in the bibliography but not actually referred to in the report will have marks deducted.
Assignments that are not proof-read will be marked down. Grammar and sentence structure are
important. Business writing should be clear, succinct and front-focused, which means putting the
most important points at the very start.
Answer the questions in the order that they are asked. Be sure to include sub-headings that contain
the question number.
There’s no need for an introduction or conclusion. This assignment is a collection of short answer
questions.
There’s no need to write the whole question in your assignment if you’re struggling to fit everything
into the page limit. You may write the question number as a subtitle to show where each question
begins.
Plagiarism will result in a zero mark and potential disciplinary action by the University
The post Risk Management and Derivatives AFIN806 Final Project appeared first on Smashing Essays.
Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"
