Reference no: EM133152282

BAFI1026 Derivatives and Risk Management - RMIT University

Assessment - Risk Management Report

Assessment Task

This is an individual task. In this assessment, students are required to form one equity portfolio, evaluate their risks and provide solution to manage the risk. The goal of this individual assignment is to gain a better understanding of the portfolio investment (in the US stock market) and risk management process. Below are the tasks:
• to build one equity investment portfolio and justify the stock selection
• to hold the portfolio from Thursday, 28th April 2022 toFriday, 20 May 2022 and observe its changes
• to identify the portfolio risk by reporting portfolio's VaR
• to provide suggestions of managing the risk
• to communicate your investment and risk management process using a professional report

Portfolio Creation

Please follow the following steps to build one portfolio.
1. Create an account (with your real first & surname) on www.marketwatch.com
2. Create a watchlist of one Portfolioon Thursday, 28th April 2022
Note:The specified date here is used to start the observing period of your portfolios, not the date on which you must perform the task. For example, you can create portfolios either on Thursday, 28th April 2022,or on dates such as 5th May 2022 or 10th May 2022, but you will still observe the price change between the sample period Thursday, 28th April 2022 - Friday, 20 May 2022.As an illustration, this is the link to the historical daily prices of the AMZN stock.
Download AMZN Data | Amazon.com Inc. Price Data | MarketWatch
3. This watchlist of Portfolio ($1 million) consists of Four stocks from the S&P 500
a. Choose any Three stocks from Table 1 (that are the largest in S&P500 index) plus Tesla (TSLA)
b. Make the number of shares for TSLA equal to "Last three digits of your student number" if they are larger than 99.
c. Make the number of shares for TSLA equal to "First three digits of your student number" if your last three digits are smaller than or equal to 99.
d. Example: For student S7777777, you need to hold 777 shares of TSLA in your Portfolio. For student S6660011, you need to hold 666 shares of TSLA in your Portfolio.
e. Determine the weights and shares for the rest of the stocks you chose in step a.
f. You have USD 1 million for this Portfolio.
Note: Since the shares can't be bought in fraction, a tiny variation from the specified budget is acceptable. You can choose to hold some Cash if you believe the investment opportunity is not good enough, but you will need to justify this decision in your report. The total $1 million investment you have is based on the share prices on Thursday, 28th April 2022.

4. Take screenshots of your portfolio and the necessary information in all sections. Make sure you attach them in the Appendix of your submitted report.
5. Suppose this is a Buy-and-Hold strategy, therefore, do not change your portfolio setting during your holding period Thursday, 28th April 2022 - Friday, 20 May 2022.

Guideline for Investing and Calculations

Marking Guide Your report must include the following sections:

1. Trading philosophy:
Give an overview of your philosophy to form the portfolio. You should identify yourself as a value or growth investor or a mixture of both.Provide brief definitions for value/growth investing.

2. Portfolio construction:
Present your initial portfolio, including information on why you have invested in the stocks in your initial portfolio (three stock selection for Portfolio).
a. The overall market and macroeconomic condition
b. Industry consideration and/or diversification, specific stock's strengths/positive prospects

3. Risk identification:
In this part, you should discuss the risk profile of your portfolio. Use daily historical stock price between 1st October 2017 and 27th April 2022 to calculate the VaR of your Portfolio (VaR template can be found in Week 11's material on Canvas). The discussion should include the following points:
a. Calculation and discussion of the one-day 95%-Value at Risk of each stock in your portfolio using historical simulation approach.That means, if you have four stocks in total, you need VaR for each.
b. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio using model- building approach. Show key steps of workings.
c. Calculation and discussion of the five-day 99%-Value at Risk of your portfolio using a historical simulation approach.
d. Discuss the performance of VaR in (b) and (c), by comparing your calculated VaR results and the portfolios' actual five-day returns (Thursday, 28th April 2022 - Wednesday 4th May 2022).
e. Calculation and discussion of the 95%-Expected Shortfall (CVaR) of your portfolio using a historical simulation approach.

4. Hedging using Options:
a. On any day between Thursday, 28th April 2022and the assessment due date, how will you use the option contract to hedge one of your three selected stocks in your Portfolio . You need to determine and explain which option you want to use (i.e., specify whether it is a call or put, when the expiration date is, appropriate strike price, whether you should go long or short, number of contracts, etc.). Provide justification for your decision.
Note: If you are not able to backdate historical price for the option, feel free to use the available price whenever you start drafting the answer to this question. For example, if your start to look at this question on 21st May 2022, and cannot find the historical option price on 5th May 2022, then it is fine to use the option price on 21st May 2022.

b. Discuss when you will exercise your option and its potential payoff.

5. The professionalism of the report. (e.g., Usage of professional Figures and Tables, with numbering and captions.)

Attachment:- Derivatives and Risk Management.rar