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. 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. 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). 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). Taski (11 marks): 1.a Correct options prices, strategy and reasonable justification. (4 marks) 1.b Correct Profit/Loss with and without hedging. (4 marks) 1.c Correct strategies and proper justification for the best strategy. (3 marks) Ticker Company name APPLE INC Date 2-Jan-08 Stike Price 200 Bid Price - Call 39.3 Ask Price - Call 39.65 Bid Price - Put 36.95 Ask Price Put 37.3 Stock Price 194.84 AAPL Company Name APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC Date 31-Jan-08 29-Feb-08 31-Mar-08 30-Apr-08 30-May-08 30-Jun-08 31-Jul-08 29-Aug-08 30-Sep-08 31-Oct-08 28-Nov-08 31-Dec-08 Stock Price 135.36 125.02 143.5 173.95 188.75 167.44 158.95 169.53 113.66 107.59 92.67 85.35 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. 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. 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). 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). Taski (11 marks): 1.a Correct options prices, strategy and reasonable justification. (4 marks) 1.b Correct Profit/Loss with and without hedging. (4 marks) 1.c Correct strategies and proper justification for the best strategy. (3 marks) Ticker Company name APPLE INC Date 2-Jan-08 Stike Price 200 Bid Price - Call 39.3 Ask Price - Call 39.65 Bid Price - Put 36.95 Ask Price Put 37.3 Stock Price 194.84 AAPL Company Name APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC APPLE INC Date 31-Jan-08 29-Feb-08 31-Mar-08 30-Apr-08 30-May-08 30-Jun-08 31-Jul-08 29-Aug-08 30-Sep-08 31-Oct-08 28-Nov-08 31-Dec-08 Stock Price 135.36 125.02 143.5 173.95 188.75 167.44 158.95 169.53 113.66 107.59 92.67 85.35