Instructions To Students For Submission Of This Coursework

Your coursework task is to answer the following question based on key FD&RM topic areas.

Question (2,500 words)

Thetask is toexplore theconcept ofarbitrage inrelation to pricing. Theoretical pricingandthe actual listing ofprices inmarkets are sometimes atodds with oneanotherandthis can lead toinefficiencies inprices and create arbitrage trading opportunities. Your task isto describe and explain the concept ofarbitrage andshownumerically how arbitrage opportunities can occur in themarkets. You are required to observe historical market prices (in2020) and seeifthey are efficient compared to whatthe theoretical valueshouldbe.

Thisassignment isessay basedand isdesigned to show your understanding ofthisfundamental concept infinance. Yourfocus should beonarbitrage opportunitiescreated inoneof the followingmarkets;

• Creditderivatives

Or

• Forwards/futures

I plan to choose Creditderivatives.

The key focus is on the following areas;

1. Discuss theconcept ofarbitrage and howitcan be usedinyour chosenmarket. [Marked at50%]
2. Provide some analysisto demonstratefurther your understanding ofarbitrage and howsuch a strategy could beconstructed.

[Marked at 40%]

1. Your assignmentshouldbepresented inessayformat. Thispiece ofwork istheoretical and wouldsuitethis approach thebest. These marks are awardedfor the writingqualityofyourpiece.

[Marked at 10%]

Extra Guidance for the Assignment:

Cover page

Table of contents page

Introduction

Explain the purpose of the assignment and the part that would be covered in it. i.e., what are the sections that would follow?

Estimated word count 100.

Part 1.............50% Estimated word count 1250

1. Clearly define the concept of arbitrage. Is it always possible to make arbitrage, if so, how? if no than what makes it difficult to do so.

Explain different examples of Arbitrage which could be applicable to your chosen market (examples: credit arbitrage, triangular arbitrage, covered Interest arbitrage, locational arbitrage). For the sake of consistency 4 is a good benchmark number.

For each type determine the pros and the cons'(limitation)

Please use references to support your points.

1. Numerical Illustration of Arbitrage

Use hypothetical (numerical illustration) to show when arbitrage could be made. Make sure you use both cases of long and short a contract.

Part 2. Arbitrage in a Forward/CDS Market......40% Estimated word count 1000

You would need to use Arbitrage in a Forward Market using real-life data.

Here you would need to have data of prices and Forwards/CDS for a specific year. In the brief it mentions 2020. But happy if you use a different year.

Based on the data you explain how the arbitrage could be a possibility. You then analyse the results to state how the arbitrage was possible. For example, did you short the asset, did you borrow to buy the asset, what interest rate have you used, any consideration for transaction costs, did you apply any markup on the risk-free rate.

You then evaluate the strategy you have used. Was it completely risk free?, what are the limitations (if any)?. What are the assumptions you have made (if Any) and why?

Conclusion

You summarise your work and you explicitly state your findings and limitations.

Estimated word count 150.

Appendices

References

(For this report at least 20 references which, are journal/books based, are to be used. This excludes the websites from which you got the data). For example, if you have used 3 websites for data collection, then you would have 20+3=23 references at least.

References needs to be for every section to show a wider reading.

General: Please note the introduction and the conclusion are part of the word count, as they are part of the usual essay format of a report. Their quality is part of the mark of the last section i.e., the one with 10%.