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BFF9515 Options, Futures and Risk managementGroup assignmentSemester 1, 2014Xiaosheng Wang 25388134Haitao Zhang 25457969LU LU 21738998Due date: 16.05.2014BFF5915 Group AssignmentPart 1Compute BetaMethod: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 Beta(s) of Stocks and Portfolio

Name

Code

Weight

Beta

CROWN RESORTS

51333T(RI)

7.25%

0.8039

COMMONWEALTH BK.OF AUS.

314054(RI)

7.26%

0.8950

NATIONAL AUS.BANK

901842(RI)

3.74%

1.1317

COCHLEAR

871051(RI)

3.96%

0.8402

WESTFIELD GROUP

912307(RI)

2.56%

0.7096

TELSTRA

871685(RI)

4.60%

0.5050

MACQUARIE GROUP

865438(RI)

4.36%

1.4238

INVOCARE

28047X(RI)

3.87%

0.7210

FLIGHT CENTRE TRAVEL GP.

871048(RI)

4.28%

1.0063

CSL

131775(RI)

4.89%

0.6488

SLATER & GORDON

50509L(RI)

4.79%

0.3001

JB HI-FI

27736M(RI)

4.50%

0.8261

CARSALES.COM

67967W(RI)

4.54%

0.8459

WOOLWORTHS

322714(RI)

4.86%

0.5500

FORTESCUE METALS GP.

314160(RI)

7.15%

1.8687

The Portfolio Beta

0.6552

The beta of the portfolio is 0.6552, which is less than 1. It means the risk of the portfolio is less than market risk.Compute the number of contractsChoose the maximum portfolio loss:Considering the beta of the portfolio as well as the expectation of drop in the market in March, we decide that the maximum portfolio loss level is 5%.Identify the relevant put optionIf the maximum loss of the portfolio is 5%, then our tolerance of the drop of the index points is 7.63% (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 contractsThe 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.The cost of buying optionsThe total costs of buying options are 3,000 * $29.1 = 87,300Estimate historical volatilityFirst, 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 volatilityThe 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...

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