FINC6010 Derivative Securities- Assignment Problem

Reference no: EM132390217

FINC6010 Derivative Securities

Assignment

The VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) was down more than 80 percent on Monday, Feb 5 2018. The security, issued by Credit Suisse, was supposed to give the opposite return of the Cboe Volatility index (VIX), the market’s widely followed risk measure.

In 2019, Credit Suisse plans to hire an external consulting team, with student members from University of Sydney’s FINC6010 course, to investigate the meltdown of XIV ETNs (exchange-traded notes).

The investigation report should be in a Questions/Answers format, answering the questions raised by the management team. The 8-page report should include everything (don’t forget student IDs and student names) the consulting team wants to report to the management team. The report can use references, charts, tables, and examples for explanation. The use of formulas and calculations should be as simple/clear as possible.

TheXIV product prospectus (pricing supplement) is provided to the consulting team.Reading financial product prospectus is the important training for fund managers, financial analysts, and investment bankers.

1. What is volatility?What does VIX index (Cboe Volatility Index) measure?

2. How to construct VIX index?

3. How VIX index was constructed previously (before September 2003)?

4. How do VIX futures contracts work?

5. How do VIX options work?

6. How to use VIX futures or VIX options to bet against VIX index (bet that VIX index will go down)?

7. Now consider XIV ETNs (exchange traded notes).What is the underlying asset (index) that XIV tracks?

8. When will the XIV ETNs mature if they are notredeemed or accelerated?

9. What is early redemption for XIV ETNs? Who has the early redemption right?

10. What is the acceleration event for XIV ETNs?

11. Was XIV meltdown in Feb, 2018 associated to an acceleration event? If yes/no, provide some details.

12. Are XIV ETNs suitable for long-term investors who want to hold XIV ETNs to maturity? Why? On Feb 5, 2018, did Credit Suisse suffer huge losses on XIV meltdown? Provide your reasoning.

Reference no: EM132390217

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