金融论文代写 option,future &risk management

option,future &risk management

金融论文代写 Since my portfolio is constructed to achieve the same return as the overall market with lowest possible standard deviations

Portfolio Construction  金融论文代写

To construct my optimal portfolio of 5 stocks from the data provided, I first select five stocks for each sector (stocks are selected for 5 sectors for diversification considerations) that have better performance relatively, judging from the fundamental indicators.

金融论文代写

G8 EDUCATION is excluded because its ROE is negative and far below the sector’s ROE.

NATIONAL AUS. BANK is excluded because it underperforms BK. OF AUS. in terms of ROE and net interest rate margin (correspondingly, the latter has a higher P/B ratio).

WOOLWORTHS GROUP is excluded because WESFARMERS have higher ROE (correspondingly, the latter has a higher P/B ratio).

FLIGHT CENTRE TRAVEL GP. is exclude because its ROE is more negative and far below the sector’s ROE.

CLINUVEL PHARMACEUTICALS is excluded because it has a lower ROE but a higher P/B, indicating that it is over-valued.

Thus, the final 5 stocks to left to be form a portfolio are: IDP EDUCATION, COMMONWEALTH BK.OF AUS., WESFARMERS, STAR ENTERTAINMENT GROUP and CSL.

Then, to construct my optimal portfolio of 5 stocks, I assign different weights among the 5 stocks so that my portfolio will have the same average return as the market portfolio (using S&P/ASX 200 price index as a proxy) but with the lowest possible standard deviation based on existing data. The average stock return is the average daily return where daily return is calculated using: 金融论文代写

金融论文代写

The average return of the S&P/ASX 200 price index during 1/8/2021 to 5/10/2021 is 0.0693%. I will assign different weights among the 5 stocks above so that the expected return of my portfolio is 0.0693% but the standard deviation my portfolio is lowest possible providing that the overall weights of all 5 stocks are 100% and assuming that the expected return for individual stocks equal to average stock returns during the period. The process is calculated by EXCEL solver and the final weights of the five stocks are presented below in Table 2.

Table 2 Portfolio of 5 Stocks

Thus, in the real world, with AUD100,000 to invest, I would invest AUD 22,346.73 in IDP EDUCATION’s stock, AUD 18,101.71 in COMMONWELATH BK. OF AUS., AUD 19,808.11 in WASFARMERS, AUD 17,372.53 in STAR ENTERTAINMENT GROUP and AUD 22,370.92 in CSL. More specifically, assume that I form my portfolio on January 11st, 2021, then my portfolio would be formed by holding the given number of shares as indicated below.














































#Company# of shares to be holdWeightsDollar Allocation

(AUD)

2IDP EDUCATION112622.35% 

22346.73

3COMMONWEALTH BK.OF AUS.21318.10% 

18101.71

6WESFARMERS38519.81% 

19808.11

7 

STAR ENTERTAINMENT GROUP

474717.37% 

17372.53

10CSL8122.37% 

22370.92

 

Table 3 Portfolio Structure (Formed on 1/11/2021)

Hedging Strategy  金融论文代写

Since my portfolio is constructed to achieve the same return as the overall market with lowest possible standard deviations, my hedging objective is to reduce my risk exposure resulted from higher-than-expect standard deviations of my portfolio due to more volatile price change in my portfolio stocks. Since I have a long position in stock market, I would need to hold a short position in index futures so that my loss from stock market can be hedged by profits from future market and vice versa. For example, if the average price of my portfolio decreases, I would suffer a loss in spot market. However, if I hold a short position in futures at the same time, the price decrease would earn my a positive return in future market which reimburse my loss in spot market so that in total my portfolio is hedged or immune to the price drop in spot market and vice versa (for the case of average stock price increase).

The beta of my portfolio is the weighted beta of all individual stocks, which is 0.9909:  金融论文代写

I will hedge my portfolio using ASX SPI 200 futures to hedge my risks in longing my portfolio because my portfolio is a diversified portfolio containing stocks from 5 different sectors and is designed to achieve the same return as S&P/ASX 200 indices. The hedge will happen on 1/11/2021 when the ASI SPI 200 future price is AUD 6702. The ASX SPI 200 futures are valued at A$25 per index point. The optimal number of ASX SPI 200 futures contracts that need to be shorted is:

Thus, on January 11st, 2021, I would short 0.59 contract of ASI SPI 200 future whose price is then AUD 6702.

Performance of Hedging Strategy

I purchase the portfolio on January 11st, 2021 and hold it for 2 weeks then evaluate its performance on January 22nd, 2021.

If my portfolio is unhedged, then the beginning value of my portfolio on 1/11/2021 is AUD 100,000 and the ending value of my portfolio on 1/22/2021 would be AUD 101,237.26 so that I achieve a profit of AUD 1,237.26.

If my portfolio is hedged, then I also sell 0.59 ASX SPI 200 future contract on 1/11/2021 and receive AUD 99,088.25 from my short-selling. Then the ending value of my future contract is higher at AUD 100,300.61. I thus experience a loss in the size of AUD 1212.36 due to my short position in future contract. Then the hedged portfolio overall would have a profit of AUD 24.90.  金融论文代写

With no hedging, I would experience a positive gain of AUD 1,237.26 but with hedging, I would experience a very slight gain of AUD 24.90. The hedging is successful in the sense that it almost makes my portfolio immune to the price change: with hedging, the value change of my portfolio is a lot smaller (24.90 << 1237.26) since the gain in spot market is offset by the loss in future market. However, the hedging is not perfect in the sense that there is still change in portfolio value, which is caused by the non-perfect optimal number of hedging contract: since the size of a future contract is standard with a specified value at A$25 per index point, we don’t have an exact number of future contracts to hold, leading to residual errors in hedging. The hedge can be improved by trading at the “off-market” through the Block Trade Facility and the Exchange for Physical Facility where customized future contract is available.

金融论文代写

Table 4 Hedging Performance

 

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