Reference no: EM132714080

RISK MANAGEMENT AND DERIVATIVES

Each student is required to submit a Word file document containing their answer AND the accompanying Excel spreadsheet file containing the relevant quantitative analysis. The Excel file must be presented fully explained so the reader can readily understand the structure of the calculations. The analytical methods used in the analysis must also be fully explained in the Word file.

1. Maximum word count of the work should be about 3000 words, excluding title page, contents page, tables, figure and appendices;
2. All external sources of information are to be cited using Harvard style. Complete details of all citations are to be collected under the "List of References".
3. Equations such as formulas should be entered using an equation editor, and numbered. Complex derivations should be assigned to an appendix.
4. The complete work is to be organized in the following way:
o Title page
o Contents page
o Introduction - Body Text - Conclusion
o Any large tables and figures
o Any Appendices
o List of References

INSTRUCTIONS ASSESSMENT AND FEEDBACK
The assignment is composed of two separate sections:

Part 1

The task is to collect daily adjusted closing prices for the last three years for 10 companies of choice, making sure that the time span fully covers three years. Data need to be collected from official sources either provided by the University (Bloomberg, DataStream) or web based
(YahooFinance). In addition to stock prices, each student is required to collect adjusted daily closing prices for the FTSE350 index. The list of stocks will form a portfolio and each student can freely choose the weighting of each stock in the portfolio, except equal weighting. The report
should include the following:

1. Relevant descriptive statistics of the data set for the 10 equities and the market index
2. An estimation of the 1-day VaR at 95% and 99% confidence levels for the portfolio with the chosen weights
3. The 10-days VaR at 95% and 99% confidence levels for the portfolio with the chosen weights
4. The estimation of expected shortfall (CVaR) for both VaRs in 2. and 3.

The VaR estimation must be performed using both the variance-covariance method as well as the historical simulation method. Where suitable, students may include graphs to support their University of Bradford- Faculty of Management, Law and Social Sciences argument.

Students are required to fully explain the procedure and estimation methods, using references from the academic literature and regulation, rather than textbooks.

Part 2
The task is to numerically value 2 options, one call and one put (European or American) on one of the stocks selected in part 1 by using the binomial lattice framework and comparing the result with the Black-Scholes option valuation method.
Guidelines:
1. The options to be valued and the underlying asset are to be selected according to the student's choice
2. The two options, one call and one put must have the same strike price and maturity and the maturity must be at least 6 months.
3. Both results obtained using the binomial lattice and Black-Scholes formula have to be compared with the market price.
4. Put-call parity relationship needs to be shown.
5. The lattice should have at least 200 steps.
6. Sensitivity analysis should be performed.
Students are required to fully explain the procedure and estimation methods, assumptions and thoroughly compare their results with the market price of the option, identifying potential reasons for miss-pricing. Students need to fully refer to the academic literature rather than textbooks.

Attachment:- Risk management and derivates assignment.rar