This course requires that you complete a project. You will be required to submit your project in two parts:
- Part 1 is submitted as part of week 7
- Part 2 is submitted as part of week 12
Futures and exchange-traded options are widely available for the following asset classes:
For each of these asset classes, please develop a well-reasoned hypothesis regarding the relative performance of two assets within the asset class. A relative performance trade (otherwise known as a pairs trade) does not require you to identify whether a given security will increase or decrease or value. Instead, it requires the following:
1. Identify two assets within the asset class.
2. Identify which of the two assets you believe will outperform the other asset.
3. Long the asset that you believe will outperform and short the asset that you believe will underperform.
Relative performance trade example
Here is an example of a relative performance trade.
Imagine you are forming a relative performance hypothesis related to the following two stocks in the apparel stores industry:
You do not know whether the overall stock market will increase in value or decrease in value in the future. But you do believe that whether markets increase or decrease in value, GAP, Inc. will outperform TJX Companies. Therefore, you should long Gap, Inc. and short TJX Companies. If you do so:
- If markets increase in value, your long position in Gap, Inc. will increase in value more than your short position in TJX Companies will decrease in value.
- If markets decrease in value, your long position in Gap, Inc. will lose less money than your short position in TJX Companies will earn in value.
For each hypothesis, please develop an exchange-traded derivatives trade that can monetize the view. Hence, derivatives that do not trade on exchanges, such as forwards, credit default swaps, or interest rate swaps, should not be used. Only use derivatives – do not use any cash products such as stocks or bonds.
Please assume that you have up to $1,000,000 to allocate to each strategy (for the purpose of premiums and/or margin).
Please assume that you will acquire the position sometime during June 15, 2018, and will hold it until sometime during the week of July 2, 2018. Please do not develop dynamic strategies that require buying or selling between June 15 week and July 3 week. So there will only be two relevant dates:
The date you enter into the position, June 15 week.
The date you close out the position, sometime July 2 week
This project has two deliverables, as follows:
Deliverable 1: Please submit this week a report that describes your hypotheses and trades in detail (a link is provided below the project description through which you should submit Deliverable 1). Make sure that your plan is as realistic as possible, and incorporates all premiums and margin/collateral requirements. Your report should be 5 pages in length and should include the following sections:
- A single-page summary of your trades (1 page in total).
- A discussion of your hypotheses (1 separate page per trade).
- A discussion of the trade that you implemented, including detailed numbers with supporting evidence (i.e., a screen grab) from your data source (1 separate page per trade).
Deliverable 2: a detailed report that describes the performance of your trades. Exactly how much did you earn on each trade? Please make sure to describe your performance in specific dollar terms, not percentage terms. Your report should be three pages in length and include the following sections:
- A single-page summary of the performance of your trades (1 page in total).
- A discussion of the performance of your trades including a discussion explaining any failures, and including detailed numbers with supporting evidence (i.e., a screen grab) from your data source (only 1 page per trade).
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