SUMMATIVE ASSIGNMENT - FINN40715
Derivative Markets
Main
Part 1 (750 words max). You will be assigned a unique (equally weighted) equity portfolio of value $1,000,000. Create a minimum variance hedge for this portfolio using futures contract(s). The hedge should be initiated on 1 September 2021 for 30 calendar days.
a) Discuss the futures contract(s) that you would use as part of your hedging strategy. Describe your implementation strategy and report the minimum variance hedge. (15 marks)
b) Analyse the in-sample and out-of-sample performance of your hedge. (15 marks)
c) Critically discuss the limitations of your approach and the further issues that need to be considered when hedging equity portfolios. (20 marks)
Part 2 (750 words max). You will be given specific stocks and asked to collect and analyse options data related to these stocks.
a) Explain the concepts of volatility smile/skew. Plot the implied volatility for one of these stocks (either for the call or for the put) for the expiration date of 15 March 2024. (15 marks)
b) Discuss two option-implied volatility measures. Explain the relation of these measures to the Black-Scholes option pricing model. (15 marks)
c) Using the data provided, explore whether your chosen option-implied volatility measures are significant predictors of future stock returns. Discuss the implications of your results for portfolio management. (20 marks)
Overall word limit: 1500
SUBMISSION INSTRUCTIONS
Your completed assignment must be uploaded to Learn ULTRA
no later than 11:59am (UK time) on 22 January 2024.
It is your responsibility to back up your work. IT issues are not a valid reason for a late submission.
You should back up your work on more than one device.
A penalty will be applied for work uploaded after 11:59am as detailed in the Late submission policy. You must leave sufficient time to fully complete the upload process before the deadline and check that you have received a receipt. At peak periods, it can take up to 30 minutes for a receipt to be generated.
Assignments should be typed, using 1.5 spacing and an easy-to-read 12-point font. Assignments and dissertations/business projects must not exceed the word count indicated in the module handbook/assessment brief.
The word count should:
§ Include all the text, including title, preface, introduction, in-text citations, quotations, footnotes and any other items not specifically excluded below.
§ Exclude diagrams, tables (including tables/lists of contents and figures), equations, executive summary/abstract, acknowledgements, declaration, bibliography/list of references and appendices. However, it is not appropriate to use diagrams or tables merely as a way of circumventing the word limit. If a student uses a table or figure as a means of presenting his/her own words, then this is included in the word count.
Examiners will stop reading once the word limit has been reached, and work beyond this point will not be assessed. Checks of word counts will be carried out on submitted work, including any assignments or dissertations/business projects that appear to be clearly over-length. Checks may take place manually and/or with the aid of the word count provided via an electronic submission. Where a student has intentionally misrepresented their word count, the School may treat this as an offence under Section IV of the General Regulations of the University. Extreme cases may be viewed as dishonest practice under Section IV, 5 (a) (x) of the General Regulations.
Very occasionally it may be appropriate to present, in an appendix, material which does not properly belong in the main body of the assessment but which some students wish to provide for the sake of completeness. Any appendices will not have a role in the assessment - examiners are under no obligation to read appendices and they do not form part of the word count. Material that students wish to be assessed should always be included in the main body of the text.
Guidance on referencing can be found on Durham University website and in the Student Information Hub.
MARKING GUIDELINES
Performance in the summative assessment for this module is judged against the following criteria:
· Relevance to question(s)
· Organisation, structure and presentation
· Depth of understanding
· Analysis and discussion
· Use of sources and referencing
· Overall conclusions