Module Derivatives and Risk Management
Topics covered -
1. Derivative Securities
2. Forward/Futures Contracts
3. Futures Market and futures pricing
4. Speculation with futures contracts
5. Pricing futures contracts
6. Stock index futures, currency futures- hedging and speculating
7. Option markets
8. Option payoff profiles
9. Uses of options
10. Guaranteed bond- a financial product
11. More on options strategies
12. Pricing options
13. Hedging and volatility
14. Binomial option pricing model (BOPM)
15. Replication portfolio
16. Calculating the values, implied volatility, deltas, and gammas of call and put options using Black-Scholes Model
17. Swaps
18. Pricing interest rate swaps
19. Currency swaps
20. Calculate swap values
21. Introduction to Risk Management
22. Forecasting volatility
23. Forecasting var for more complex portfolio
24. Alternative approaches to measure VAR
Answers to assignment question must apply to the topics covered in the module
Question 1 -
Write a short briefing report to the senior management team of your financial institution (not to exceed 1,500 words).
You work for a building society (i.e. mortgage bank/company) and you want to offer a 10 year fixed rate mortgage at a rate of 2.5%. Your main business is to take short term deposits from retail investors and to offer mortgages. Carefully explain to a new non-executive director how you would hedge the risk of offering such a low fixed rate mortgage. Also outline to the non-executive director how you would calculate the fixed rate mortgage rates which you consider offering.
Question 2 -
The following table contains information about your international equity portfolio. You are based in London and you operate in Pound Sterling. (Please note that on the London Stock Exchange stock prices are reported in pence, whereas in Frankfurt and NY stocks are being quoted in Euros and US Dollars respectively.) Stock price data and exchange rate data are given in the Excel spreadsheet .Write a report to the senior management team about the performance of your risk management systems. Your senior management team is interested in your risk position over the next 10 days, how well it performs and what can be done to reduce your overall risk exposure. Produce a well presented easy to understand report which shows your VaR calculations over the last 6 months.
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Table 1 - International Equity Portfolio
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Country
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Company
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Number of Shares
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UK
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BP
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1,050,000
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USA
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General Electric
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336,700
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UK
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Vodafone
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5,152,000
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Germany
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BMW
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237,135
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UK
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Glaxo
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970,000
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a. Calculate the 10-day VaR of your portfolio at 95 percent confidence level using the variance covariance approach on the dates given in table 2. (You will have to perform those calculations 12 times.)
Date of Calculation of 10 Day VaR Forecast
1. 3rd February 2017
2. 17th February 2017
3. 3rd March 2017
4. 17th March 2017
5. 31th March 2017
6. 14th April 2017
7. 28th April 2017
8. 12th May 2017
9. 26th May 2017
10. 9th June 2017
11. 23rd June 2017
12. 7th July 2017
b. Calculate the 10 day VaR at 95 percent confidence level using Historic Simulation for all the dates outlined in table 2.
c. Compare your twelve VaR estimates with the realized outcomes. Comment on how well your model has performed and comment on your findings from a risk management perspective.
d. Briefly discuss generally how you could use derivatives to reduce the riskiness of your equity portfolio.
Please state any assumptions you are using in your calculations.
Attachment:- Assignment Files.rar