A

2. Develop a delta neutral strategy for the period 03/08/2020 to 20/08/2020 to hedge against short term volatility. Explain how the strategy will work, and detail all transactions for undertaking the strategy. You are required to perform at least one re-balancing. (8 points) Data: daily stock and option prices Assessment criteria: o Clearly stated hedging objective(s), determined in light of prevailing market conditions o Clear explanation of why and how the strategy will contribute to your objective o Correct implementation of delta hedge o Correct implementation of at least one rebalancing transaction o Full details of transactions captured in a table with appropriate narrative of all relevant transactions that may occur in real world investment 3. At the end of the period, close all the positions and evaluate the effectiveness of your strategy. (5 points) Assessment criteria: o Correct liquidation of positions and calculations of profit/loss o Effectiveness of the hedge and reasons why the hedge strategy worked/failed to work as you expect o Discuss how the hedge can be improved taking into account the shortcomings you identified above Part B (7 marks) Create a synthetic stock to replicate the payoff of the stock identified in Part A. Hold the synthetic stock for the same period as in Part A. Make a record of all transactions and profit/loss of the strategy. At the end of the said period, evaluate your positon and the effectiveness of this replication strategy as compared to the delta hedge strategy in part A. Assessment criteria: o The replication strategy must be consistent in addressing the hedging objective you specified in Part A3 o Explain how the portfolio can replicate the payoff of the stock o Correct implementation of replication strategy, showing full details of transactions o Evaluation of the strategy in comparison to the delta hedge in part A. Is one strategy necessarily superior than the other?

2020-8-3 2020-8-4 2020-8-5 2020-8-6 2020-8-7 2020-8-10 2020-8-11 2020-8-12 2020-8-13 2020-8-14 2020-8-17 2020-8-18 2020-8-19 2020-8-20 277. 1499 283. 1599 278. 1499 277. 7500 274. 1899 279. 5200 280.9800 281.7300 277.8000 279. 3401 281.0200 293. 2900 312.0500 300.0000 0.3805 0.3805 0.3810 0.3807 0. 3809 0.3809 0. 3809 0.3809 0.3810 0.3804 0.3804 0.3827 0.3872 0.3891 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.3311 0.3184 0.3269 0.3263 0.3269 0. 3281 0.3187 0.3189 0.3189 0.2958 0.2975 0.2846 0.2276 0.2422 CSL CONTINUOUS CALL IMPLIED VOL (ATM) 0.3303 0.3216 0.3259 0.3265 0. 3246 0.3255 0.3236 0.3135 0.3135 0.2961 0.3007 0.2750 0.2392 0.2454 CSL CONTINUOUS PUT - IMPLIED VOL (ATM) 0.3864 0.3804 0.3871 0.3908 0.3940 0.4252 0.4287 0.4364 0.4364 0.4190 0.5729 0.7116 0.6093 HA 2. 2050 3. 1800 2.0250 1.8150 1. 1700 1.6800 1. 7150 1.6500 0.9150 0.6650 0.7500 3.4500 12.5600 HA 0.1818 0.2465 0.1775 0.1660 0.1200 0.1657 0. 1736 0. 1734 0.1734 0.0961 0.1086 0.3435 0.8949 HA 0.3900 0.3810 0.3854 0.3865 0.3883 0.4275 0.4292 0.4447 0.4447 0.4070 0.5816 0.7181 0.5246 NA CSL CSL - HISTORICAL VOLATILITY 1 YEAR Mean of historical volatility CALL ACSL AUG 20 300 ILIPLIED YOL. CALL ACSL AUG 20 300 CALL ACSL AUG 20 300 OPTION DELTA PUT ACSL AUG 20 300 ILIPLIED VOL. 2020-8-3 2020-8-4 2020-8-5 2020-8-6 2020-8-7 2020-8-10 2020-8-11 2020-8-12 2020-8-13 2020-8-14 2020-8-17 2020-8-18 2020-8-19 2020-8-20 277. 1499 283. 1599 278. 1499 277. 7500 274. 1899 279. 5200 280.9800 281.7300 277.8000 279. 3401 281.0200 293. 2900 312.0500 300.0000 0.3805 0.3805 0.3810 0.3807 0. 3809 0.3809 0. 3809 0.3809 0.3810 0.3804 0.3804 0.3827 0.3872 0.3891 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.2525 0.3311 0.3184 0.3269 0.3263 0.3269 0. 3281 0.3187 0.3189 0.3189 0.2958 0.2975 0.2846 0.2276 0.2422 CSL CONTINUOUS CALL IMPLIED VOL (ATM) 0.3303 0.3216 0.3259 0.3265 0. 3246 0.3255 0.3236 0.3135 0.3135 0.2961 0.3007 0.2750 0.2392 0.2454 CSL CONTINUOUS PUT - IMPLIED VOL (ATM) 0.3864 0.3804 0.3871 0.3908 0.3940 0.4252 0.4287 0.4364 0.4364 0.4190 0.5729 0.7116 0.6093 HA 2. 2050 3. 1800 2.0250 1.8150 1. 1700 1.6800 1. 7150 1.6500 0.9150 0.6650 0.7500 3.4500 12.5600 HA 0.1818 0.2465 0.1775 0.1660 0.1200 0.1657 0. 1736 0. 1734 0.1734 0.0961 0.1086 0.3435 0.8949 HA 0.3900 0.3810 0.3854 0.3865 0.3883 0.4275 0.4292 0.4447 0.4447 0.4070 0.5816 0.7181 0.5246 NA CSL CSL - HISTORICAL VOLATILITY 1 YEAR Mean of historical volatility CALL ACSL AUG 20 300 ILIPLIED YOL. CALL ACSL AUG 20 300 CALL ACSL AUG 20 300 OPTION DELTA PUT ACSL AUG 20 300 ILIPLIED VOL