AF5038 Derivatives and Risk
Instructions on Assessment:
The assignment is an individual written piece of work (as opposed to a piece of written group work) and you are required to answer all three elements of the question.
The investment management department of your company has asked you to construct a speculative trading strategy using options.
You have been instructed to invest £100,000 in an options trading strategy for a publicly
traded company’s shares for the period between 1st March 2024 and 26th April 2024 (inclusive). You are encouraged to use European options for UK-listed companies from the non-financial sector, however this is not a requirement.
AF5038 Derivatives and Risk
Section A: (1000 words, 35 marks)
For the company whose shares are to be the underlying for your options, set up a speculative option-based trading strategy given your view of the company, current market sentiment regarding the segment in which it operates, and likely market movements over the period.
You must support your analysis using real-world market data (appropriately evidenced) as well as suitable academic literature covering analysis methods such as, for instance, macroeconomic, news, fundamental, technical, etc.
You must include screenshot evidence of the source of your options pricing in an appendix and
discuss how the strategy you are proposing is consistent with your share price forecast and market outlook.
Out of 35 marks awarded for Section A, 25 marks are allocated to your forecasting of the underlying and 10 marks are allocated to the justification of the speculative option strategy consistent with such a forecast.
AF5038 Derivatives and Risk
Section B: (500 words, 10 marks)
What is the payoff structure of the strategy you have suggested and what is the annualised return you are targeting based on your approach?
Assess the risk that your strategy will not produce the returns you have anticipated. You must also discuss and evaluate the risks that the use of an options derivative instrument has introduced to the investment management department. APA.
Section C: (500 words, 15 marks)
Report on the actual profit and loss of your strategy over the period and analyse its realised performance relative to your forecast.
Discuss why the strategy achieved the observed results.