Derivatives Individual Assignment Solution by Experts

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Part A (10 marks)

From the implied volatility data across different strike prices provided for the period 1^st January 2021 to 15^th August 2021, determine the directional bias and potential price swings expected in the market. You are required to, at a minimum:

select an appropriate delta to plot the put-call ratio for the period 1^st January 2021 to 15^th August Explain your choice of delta. (3 marks)
analyze the put-call ratio graph to determine the market expectation for the period of 16^th August – 30^th August 2021. Explain your findings and how that lead to your conclusion of whether the market is likely to be bullish, bearish or (4 marks)
plot the volatility skew or smile on the 16^th Assuming the At-The-Money options (45 – Delta) are fairly valued, explain the implications of the volatility skew/smile and how that influence your choice of option strategy. (3 marks)

Part B (9 marks)

Based on your analysis in Part A, execute an option strategy for the period 16^th August to 30^th August 2021 to capitalise on the opportunity presented. You are required to, at a minimum:

determine an option strategy appropriate to your analyses in Part A. Explain your choice of the strategy and its execution. (5 marks)
tabulate and evaluate the performance of the strategy in terms of risk and return, and potential (4 marks)

Part C (9 marks)

Assume $1,000,000 fully invested in the relevant stock on the 16^th of August. Based on the market expectation determined in part A, implement a futures hedging strategy for the period 16^th August to 30^th August 2021. You are required to, at a minimum:

implement the futures hedging Explain the strategy and its execution, and how that is appropriate to your analyses in Part A. (5 marks)
tabulate and evaluate the performance of the strategy in terms of risk and return, and potential (4 marks)

Report writing and presentation (2 marks)

Your report must document a complete discussion of the process outlined above, including full details of transactions executed. Transaction costs must bear evidence that it is a realistic figure. Good structure, presentation and concise writing skills are likewise important. Your report length must have a minimum word count of 2,500 words (size 12 font, 1.5 spacing), including all discussion, graphs, tables and references.

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