Options, Futures and Risk Management III

Group Assignment 1 (20%)

You are required to work in GROUPS of three members. Assignment groups (limited to three members) have been created under "people - assignment 1 group" tab in MyUni, i.e. Group 1 to 66.Please access this tab to self-enrol into any group number.Individual assignment as well as late submission would not be considered unless prior approval had been obtained.Submit your assignment electronically via the Turnitin Assignment tool by 4pm April 25, 2018.The link for the Turnitin Assignment tool has been created for you under the Assignment 1 page on MyUni.Please indicate your group number when submitting your assignment, for example, 'Group 57'. You will need to upload a Word version of your assignment to Turnitin.ONLY e-submissions will be accepted.For guidance on how to submit your assignment electronically via MyUni, please visit http://www.adelaide.edu.au/myuni/tutorials and click on the "Submit an Assignment" tutorial.Only one submission is to be made and in the name of the group leader.A group assignment submission form with student ids and signatures of ALL group members must be attached.Please also indicate all group member names and student ids on the first page of the assignment.You may obtain daily stock and options prices at http://www.afr.com/share-tablesIt is vital that you start collecting daily options and stock prices from today so that you have all the data you require for the entire two weeks period to be covered in this assignment.

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Assignment 1

The spate of market gyrations in recent times have had a significant impact on options pricing dynamics, leading to higher implied volatility and steepened volatility skew or smile across a spectrum of strike prices.Careful analysis of the volatility skew or smile may present trading opportunities.

You are required to:

Identify an option skew or smile for any option class in any market in the world.Explain and illustrate clearly the skew or smile you have identified.

Develop and justify a strategy that will make money from the derivative you identified above.Specifically, detail the costs, profit/loss and breakeven points of undertaking this strategy.

Over the next two weeks determine and explain the changes to the volatility smile or skew you identified earlier.Show what adjustments you can make to address the changes.Make a record of all transactions and profit/loss of the adjustments.

At the end of the two weeks period, evaluate the effectiveness of your initial strategy, the reasons for its success or failure, and how the outcome could be improved. Calculations are required to support your discussion.

Volatility skew/smile and gamma are both volatility-oriented strategies.Compare and contrast the two trading strategies.

Write a report to document in chronological order the transactions executed.The report must discuss all the above processes, which will form the crux of what you will be assessed on, along with presentation and concise writing skills. Your report length can be a MAXIMUM of 10 pages, including all discussion, graphs, tables, data and references.