Question: Task 1 You work as a trader for an equity fund. On the first trading day of 2008, you are concerned that your long position

Task 1

You work as a trader for an equity fund. On the first trading day of 2008, you are concerned that your long position (1,000 stocks) in a large company in the U.S equity market is subject to significant downside risks for the year, as some potentially negative news could result in market crashes. However, you have no plans to liquidate your long position until the end of 2008.

  1. a) Devise a strategy involving taking long positions in options to help protect your stock holdings from potentially negative market movements. You should describe the key attributes of the options you use and justify your choices.

  2. b) Assume you implemented the strategy you devised from part a), calculate the month-end (for every holding months) gains/losses for your position with and without hedging, compared with your initial position at the beginning of the year. Was your hedging strategy an effective one? (Hint: you should evaluate the effectiveness of your hedging strategy once you liquidate your stock position at the end of 2008).

  3. c) In early 2008, the popular prediction is that the market will experience a downturn, hence most hedging strategies focus on loss minimisations. Imagine a scenario where prices are extremely volatile, but no one can predict the direction, and you have a long position in stocks. Design two different strategies involving taking long positions in options to minimise losses and capture potential gains. Justify which one is the best. (Hint: you do not need to provide calculations of profit or loss here).

Company name Ticker Date Stike Price Bid Price - Call Ask Price - Call Bid Price - Put Ask Price Put Stock Price
APPLE INC AAPL 2-Jan-08 200 39.3 39.65 36.95 37.3 194.84
BOEING CO BA 2-Jan-08 90 9.2 9.5 10.7 11 86.62
CHEVRON CORP CVX 2-Jan-08 95 10 10.3 10.5 10.7 93.46
COCA-COLA CO KO 2-Jan-08 62.5 4.7 4.9 5.3 5.5 61.09
WALT DISNEY CO DIS 2-Jan-08 32.5 3.4 3.7 3.2 3.4 31.84
GOLDMAN SACHS GROUP INC GS 2-Jan-08 210 34.1 35 30.5 31 207.6
HOME DEPOT INC HD 2-Jan-08 30 2.4 2.5 6 6.2 26.11
INTERNATIONAL BUSINESS MACHINE CORP IBM 2-Jan-08 105 12.2 12.5 10.5 10.8 104.69
MERCK & CO INC MRK 2-Jan-08 60 5.2 5.4 7.1 7.4 57.37
VERIZON COMMUNICATIONS INC VZ 2-Jan-08 45 3.7 3.9 5.8 6

43.21

Company Name Date Stock Price
APPLE INC 31-Jan-08 135.36
APPLE INC 29-Feb-08 125.02
APPLE INC 31-Mar-08 143.5
APPLE INC 30-Apr-08 173.95
APPLE INC 30-May-08 188.75
APPLE INC 30-Jun-08 167.44
APPLE INC 31-Jul-08 158.95
APPLE INC 29-Aug-08 169.53
APPLE INC 30-Sep-08 113.66
APPLE INC 31-Oct-08 107.59
APPLE INC 28-Nov-08 92.67
APPLE INC 31-Dec-08 85.35
BOEING CO 31-Jan-08 83.18
BOEING CO 29-Feb-08 82.79
BOEING CO 31-Mar-08 74.37
BOEING CO 30-Apr-08 84.86
BOEING CO 30-May-08 82.77
BOEING CO 30-Jun-08 65.72
BOEING CO 31-Jul-08 61.11
BOEING CO 29-Aug-08 65.56
BOEING CO 30-Sep-08 57.35
BOEING CO 31-Oct-08 52.42
BOEING CO 28-Nov-08 42.63
BOEING CO 31-Dec-08 42.67
CHEVRON CORP 31-Jan-08 83.25
CHEVRON CORP 29-Feb-08 86.66
CHEVRON CORP 31-Mar-08 85.36
CHEVRON CORP 30-Apr-08 96.15
CHEVRON CORP 30-May-08 99.15
CHEVRON CORP 30-Jun-08 99.13
CHEVRON CORP 31-Jul-08 84.56
CHEVRON CORP 29-Aug-08 86.32
CHEVRON CORP 30-Sep-08 82.48
CHEVRON CORP 31-Oct-08 74.6
CHEVRON CORP 28-Nov-08 79.01
CHEVRON CORP 31-Dec-08 73.97
COCA-COLA CO 31-Jan-08 59
COCA-COLA CO 29-Feb-08 58.46
COCA-COLA CO 31-Mar-08 60.87
COCA-COLA CO 30-Apr-08 58.87
COCA-COLA CO 30-May-08 57.26
COCA-COLA CO 30-Jun-08 51.98
COCA-COLA CO 31-Jul-08 51.5
COCA-COLA CO 29-Aug-08 52.07
COCA-COLA CO 30-Sep-08 52.88
COCA-COLA CO 31-Oct-08 44.06
COCA-COLA CO 28-Nov-08 46.87
COCA-COLA CO 31-Dec-08 45.27
GOLDMAN SACHS GROUP INC 31-Jan-08 199.55
GOLDMAN SACHS GROUP INC 29-Feb-08 169.63
GOLDMAN SACHS GROUP INC 31-Mar-08 165.39
GOLDMAN SACHS GROUP INC 30-Apr-08 191.37
GOLDMAN SACHS GROUP INC 30-May-08 176.41
GOLDMAN SACHS GROUP INC 30-Jun-08 174.9
GOLDMAN SACHS GROUP INC 31-Jul-08 184.04
GOLDMAN SACHS GROUP INC 29-Aug-08 163.97
GOLDMAN SACHS GROUP INC 30-Sep-08 128
GOLDMAN SACHS GROUP INC 31-Oct-08 92.5
GOLDMAN SACHS GROUP INC 28-Nov-08 78.99
GOLDMAN SACHS GROUP INC 31-Dec-08 84.39
HOME DEPOT INC 31-Jan-08 30.64
HOME DEPOT INC 29-Feb-08 26.55
HOME DEPOT INC 31-Mar-08 27.97
HOME DEPOT INC 30-Apr-08 28.8
HOME DEPOT INC 30-May-08 27.36
HOME DEPOT INC 30-Jun-08 23.42
HOME DEPOT INC 31-Jul-08 23.83
HOME DEPOT INC 29-Aug-08 27.12
HOME DEPOT INC 30-Sep-08 25.89
HOME DEPOT INC 31-Oct-08 23.59
HOME DEPOT INC 28-Nov-08 23.11
HOME DEPOT INC 31-Dec-08 23.02
INTERNATIONAL BUSINESS MACHINE CORP 31-Jan-08 107.11
INTERNATIONAL BUSINESS MACHINE CORP 29-Feb-08 113.86
INTERNATIONAL BUSINESS MACHINE CORP 31-Mar-08 115.14
INTERNATIONAL BUSINESS MACHINE CORP 30-Apr-08 120.7
INTERNATIONAL BUSINESS MACHINE CORP 30-May-08 129.43
INTERNATIONAL BUSINESS MACHINE CORP 30-Jun-08 118.53
INTERNATIONAL BUSINESS MACHINE CORP 31-Jul-08 127.98
INTERNATIONAL BUSINESS MACHINE CORP 29-Aug-08 121.73
INTERNATIONAL BUSINESS MACHINE CORP 30-Sep-08 116.96
INTERNATIONAL BUSINESS MACHINE CORP 31-Oct-08 92.97
INTERNATIONAL BUSINESS MACHINE CORP 28-Nov-08 81.6
INTERNATIONAL BUSINESS MACHINE CORP 31-Dec-08 84.16
MERCK & CO INC 31-Jan-08 46.1
MERCK & CO INC 29-Feb-08 44.3
MERCK & CO INC 31-Mar-08 37.95
MERCK & CO INC 30-Apr-08 38.04
MERCK & CO INC 30-May-08 38.96
MERCK & CO INC 30-Jun-08 37.69
MERCK & CO INC 31-Jul-08 32.9
MERCK & CO INC 29-Aug-08 35.67
MERCK & CO INC 30-Sep-08 31.56
MERCK & CO INC 31-Oct-08 30.95
MERCK & CO INC 28-Nov-08 26.72
MERCK & CO INC 31-Dec-08 30.4
VERIZON COMMUNICATIONS INC 31-Jan-08 38.83
VERIZON COMMUNICATIONS INC 29-Feb-08 36.32
VERIZON COMMUNICATIONS INC 31-Mar-08 36.45
VERIZON COMMUNICATIONS INC 30-Apr-08 38.48
VERIZON COMMUNICATIONS INC 30-May-08 38.47
VERIZON COMMUNICATIONS INC 30-Jun-08 35.4
VERIZON COMMUNICATIONS INC 31-Jul-08 34.04
VERIZON COMMUNICATIONS INC 29-Aug-08 35.12
VERIZON COMMUNICATIONS INC 30-Sep-08 32.09
VERIZON COMMUNICATIONS INC 31-Oct-08 29.67
VERIZON COMMUNICATIONS INC 28-Nov-08 32.65
VERIZON COMMUNICATIONS INC 31-Dec-08 33.9
WALT DISNEY CO (THE) 31-Jan-08 29.84
WALT DISNEY CO (THE) 29-Feb-08 32.41
WALT DISNEY CO (THE) 31-Mar-08 31.38
WALT DISNEY CO (THE) 30-Apr-08 32.43
WALT DISNEY CO (THE) 30-May-08 33.6
WALT DISNEY CO (THE) 30-Jun-08 31.2
WALT DISNEY CO (THE) 31-Jul-08 30.35
WALT DISNEY CO (THE) 29-Aug-08 32.35
WALT DISNEY CO (THE) 30-Sep-08 30.69
WALT DISNEY CO (THE) 31-Oct-08 25.91
WALT DISNEY CO (THE) 28-Nov-08 22.52
WALT DISNEY CO (THE) 31-Dec-08 22.69

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