Risk Management and Derivatives AFIN806
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.
Name your file as;
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:
1.Final Project Report;
2.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% non parametric 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]
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.
Turnitin # if applicable
I certify that: • This assessment is my own work, based on my personal study and/or research; • I have acknowledged all material and sources used in the preparation of this assessment, including any material generated in the course of my employment; • If this assessment was based on collaborative preparatory work, as approved by the teachers of the unit, I have not submitted substantially the same final version of any material as another student; • Neither the assessment, nor substantial parts of it, have been previously submitted for assessment in this or any other institution; • I have not copied in part, or in whole, or otherwise plagiarised the work of other students; • I have read and I understand the criteria used for assessment; • The assessment is within the word and page limits specified in the unit outline; • The use of any material in this assessment does not infringe the intellectual property / copyright of a third party; • I understand that this assessment may undergo electronic detection for plagiarism, and a copy of the assessment may be retained in a database and used to make comparisons with other assessments in future. Work retained in a database is anonymous and will not be able to be matched to an individual student; • I take full responsibility for the correct submission of this assessment in the appropriate place with the correct cover sheet.