This website uses cookies to ensure you have the best experience. Learn more

Options, Futures And Risk Management Essay

2159 words - 9 pages

BFF9515 Options, Futures and Risk management
Group assignment
Semester 1, 2014

Due date: 16.05.2014

BFF5915 Group Assignment
Part 1
1. Compute Beta
* Method:
First, compute the returns of each stocks and the return of the index. They can be calculated using excel with the formula: (current price / the previous price) – 1,
Second, use covariance and variance function in excel to calculate the beta of each stock.
Third, multiply each beta with the corresponding weight to calculate the portfolio beta.
* The beta for each stocks and the beta for portfolio (see table 1.1)
Details can be seen in sheet “EquityReturnData” in the data file “Data.xlsx”.
Table 1.1 The ...view middle of the document...

63% (calculated by 5% / 0.6552). The bottom line of the index points in 20 March is 5,367.91*(1 - 7.63%) = 4958.27.
The corresponding option we choose is AXJO5000O4.AX.
* Calculate the number of contracts
The option value per contract is $10*5,000 = $50,000, where $10 is the index multiplier and 5,000 is the exercise price of the option.
So, the number of contacts we should buy is $150,000,000 / 50,000 = 3,000.
3. The cost of buying options
* The total costs of buying options are 3,000 * $29.1 = 87,300
* Estimate historical volatility
First, use standard deviation function in excel to calculate σ, which is the standard deviation of daily returns of ASX200.
Second, multiply σ by√252. The estimate historical volatility is 14.49%. Details can be obtained in sheet “Portfolio” in the data file “Data.xlsx”.
* Compute the implied volatility
The implied volatility can be calculated by using excel. Through computing, the implied volatility is 14.34%. Details can be observed in sheet “Volatility” in the data file “Data.xlsx”.
* Compare the two volatilities
It is obvious that the two volatilities are very close to each other, which means they are both acceptable. Respond to that, the cost of the put option contracts we bought is reasonable.
4. The new composition of the portfolio
Since we have bought the option contracts, the composition of the portfolio can be seen from table 4.1
Table 4.1 New Composition of the Portfolio (Date: 2/1/2014)
Market value of shares | 145,947,650 |
Cash | 3,965,050 |
Options | 87,300 |
Total | 150,000,000 |
The market value remains constant, and the option value was is from the original cash value.
5. Evaluate the effectiveness of the hedging
* The current value of the portfolio
Today is 20/3/2014, the ASX200 index point is 5294, which is greater than the strike price 5000. So, the put option will not be exercised. The current value of the portfolio can be seen from table 5.1
Table 5.1 Current Value of the Portfolio (Date: 20/3/2014)
Market value of shares | 144,631,004* |
Cash | 3,979,362* |
Options | 0 |
Total | 148,610,366 |
*144,631,004 = 145,947,650* [1 – (5367.91-5294)/5367.91*0.6552]. 145,947,650 is from table 4.1, 5367.91 is the index points in 2/1/2014 which is observed in sheet “Portfolio” in the data file “Data.xlsx”,5294 is the index points in 20/3/2014 which also retrieved from sheet “Portfolio” in the data file “Data.xlsx”. 0.6552 is the portfolio beta we have calculated at the beginning.
*3,979,362 = 3,965,050*(1+2.42%) ^ (55/365)
3,965,050 is from table 4.1 and 2.42% is the risk-free rate p.a. 55, is the trading days between 2/1/2014 and 20/3/2014.
* Compare the current value against the value on 2/1/2014.
The future value on 2/1/2014 can be seen from table 5.2
Table 5.2 Comparable Value on 2/1/2014 before Buying Options
(Date: 20/3/2014)
Market value of shares | 144.631,004 |
Cash | 4,066,978* |
Total | 148,697,982 |
*4,066,978 =...

Other Essays Like Options, Futures and Risk Management

Insurance and Risk Management Essay

1374 words - 6 pages Insurance and Risk Management Insurance, in law and economics, is a form of risk management primarily used against the risk of a contingent loss. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed

Art of War and Risk Management

770 words - 4 pages Universidad Autónoma de Nuevo León Facultad de Contaduría Pública y Administración International Business Program Finance VI Assignment: The Art of War by Sun Tzu & Risk Management Roberto Mauricio Sandoval Salazar Group: 8Vi ID: 1568794 Teacher: Eduardo Treviño Ciudad Universitaria de Nuevo León, February 28th, 201 The Art of War by Sun Tzu & Risk Management “If you know the enemy and know yourself, you need not fear

Principles of Risk Management and Insurance

786 words - 4 pages provide leadership in coping with the nation’s healthcare economy. Jenkins Jr, Holman W., Wall Street Journal, 1 June 2005 Edition, pg. A21. Fred Terry fterry@elmore.rr.com Principles of Risk Management and Insurance Wall Street Journal Assignment 4 Due 23 Jun 05 Dr Deloach “Tobacco Accord Seems Likelier As Government Cuts Demands” Slashing cost to $10 billion for stop-smoking program may help bring a settlement in the anti-smoking

Unit 504 Develop Health and Safety and Risk Management Policies

2794 words - 12 pages Develop Health and Safety and Risk Management Policies, Procedures and Practices in Health and Social Care or Children and Young People’s Settings 1.1 Explain the legislative framework for health, safety and risk management in the work setting The legislative framework for health and safety. There are many Orders and Acts regarding Health and Safety and risk management but the primary ones we use are as follows: • Health and

Value Added Statements; Risk Assessment and Corporate Financial Management

944 words - 4 pages Value Added Statements; Risk Assessment’s Role in Corporate Financial Management This paper will show the benefits of value added statements and argue for their inclusion in U.S. financial reports. The role of risk assessment in financial management will also be discussed. Gary Meek and Sidney Gray (1988) argued that value added statements (VAS) would show profits in a format that would be easily understood and usable by all stakeholders

Risk Management Developing, Manufacturing and Selling a New Product

841 words - 4 pages Developing, Manufacturing and Selling A New Product Risk Management Douglass Turner BUS4090 November 8th, 2015 Risk Identification In developing this new project for Cola Enterprises LLC, we have taken an overall view of the project in its entirety and have identified several risks. The purpose of this section is to identify the risks, assess each of the risks for severity, plan responses accordingly and develop monitoring programs

Strategic Financial Managament

3670 words - 15 pages various techniques, it involves taking equal and opposite positions in two different markets (such as cash and futures markets). A hedge can be constructed from many types of financial instruments, including forward contracts, future contracts, options, swaps, many other types of over-the-counter and derivative products. Forward Contracts Generally, the most prominent instrument used in hedging for exchange rate risk management is the

Project Report on Derivatives

5769 words - 24 pages risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. ii) Leveraged financial play-Participated by Speculators: Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give

Tiffany Case

996 words - 4 pages ) view of exposure management. So, Tiffany should plan to cover the exposures on a long term basis. 4. As instruments for risk management, what are the chief differences of foreign-exchange options and forward and futures contracts? What are the advantages and disadvantages of each? Which, if either, of these types of instruments would be most appropriate for Tiffany to use if it chose to manage exchange-rate risk? A major difference between

Managing Currency Risk with Financial and Operational Hedging Techniques

2196 words - 9 pages : Finance Learners, (2014). Advantages and Disadvantages of Futures. [online] available from . [21 March 2014] Thinktrade, (2006). The advantages and disadvantages of options. [online] available from [21 march 2014] Andrew, M.and Pauline, W. (2008) managing interest rate risk and foreign exchange risk; disclosure of objective, polices and process. [online] available from [21 March 2014] Telefónica, 2011. Derivative financial instruments and risk management policies.[online]. Available form [21 March 2014] Vodafone, (2013). Annual report for the year ended 31 march 2013. Vodafone Group PLC.

Mg Case Study

921 words - 4 pages future market to hedge and transfer the uncertain risk of price in order to achieve the purpose of deduce the risk of price fluctuation. However, when the companies are making hedge, especially the stack hedging strategy in which short dated futures are used to hedge entire sequence of cash, they are still exposed to high risk. The companies should aware the risk of hedging for making better use of future market. In the first place, the management

Related Papers

Risk And Quality Management Essay

2589 words - 11 pages Risk and Quality Management Assessment Summary Tanika Moss HCS 451 10/06/2014 Priscilla Bazil-Morris Abstract Risk and Quality management help a health care organization provide quality of care and assure the organization is following policies and procedures properly, while reducing or minimizing risks for its patients, stakeholders, shareholders, and itself (Carroll, 2009). As the consultant of Pfizer pharmaceutical company, I have been

Falls And Risk Management Essay

1331 words - 6 pages Falls and Risk Management Margaret Simon NUR 492 April 25, 2016 Dr. Rachel Gonzales Falls and Risk Management In the hospital setting falls are prevalent for various reasons. According to Sullivan (2013), “Risk management is a component of quality management, but its purpose is to identify, analyze, and evaluate risks and then develop a plan for reducing the frequency and severity of accidents and injuries” (p. 77). This paper will

Insurance And Risk Management Essay

1794 words - 8 pages INSURANCE AND RISK 1.0 Definition of insurance. Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be

Risk Management And Quality Essay

1179 words - 5 pages Risk Management and Quality Management: Learnings from Other Industries Theresa A. Atkins University Of Phoenix DHA/712 Riordan Manufacturing is a mid-size American company that was founded in 1991, employs 550 people and has projected annual earnings of $46 million. Riordan has three manufacturing locations, two in the United States and one in China. Riordan stresses the importance of strategic planning in business. Competitive