Course FI6051 - Derivative Instruments

Lecturer Finbarr Murphy

Tutorial Advisor Finbarr Murphy (Finbarr.Murphy@ul.ie)
Time + Location

Week 8 – Group Trading

Assignment Instructions
Commencing Tuesday 27th of October (week 8), you will have 3 weeks to trade and hedge an
option/stock portfolio. Trading activity will end on Tuesday November 17th (week 11). In this
activity, you should devise trading strategies, actively manage these strategies and finally you
should analyse the performance of your strategy. The objective of your strategies is to make
money but the grade awarded will be based on
• A logical, coherent strategy designed to make money
• An analysis of the strategy performance apropos of the original intention

The assignment will be completed as a group. Group teams have been allocated by email. It is
everyone’s responsibility to work together and each member should contribute actively to the
group. The group as a unit should address any perceived ‘free-loading’.

As a group, it is suggested that you should meet regularly for 30 to 45 minutes at least 3 times a
week. These meetings should discuss trading strategies and should analyse the current portfolio
performance.

The group trading assignment will terminate on Tuesday November 17th (week 11). A report of
between 2000 and 2500 words must be submitted to Turnitin.com no later than Friday, November
20th (week 11) at 5PM. The report should have a max of 2,500 words and be written in 1.5 line
spaced, times-new-roman font. As a suggestion, the report should be written as a diary, this will
avoid the need to recall and document your activity in one week.

The trading and report will constitute 25% of your module grade.

Trade Reporting
To monitor trading activity, at the end of each day where trading activity occurred, you are
required to send an email to Finbarr.Murphy@ul.ie with the subject line GROUP ? TRADING
where ? represents the group letter. If you did not trade, then you don’t need to send me an
email. This email will allow me to monitor your activity and risk limits.

Risk Limits
Your group portfolio must stay within your risk limits. These will be discussed during the tutorial
times. Breaching your risk limits will be penalised by a reduction in your grade.
Name Movement Movement Movement
Stock Limits +/- 1% +/- 5% +/- 25%
Max Loss $50,000 $200,000 $500,000
Volatility Limits +/- 1% +/- 5% +/- 10%
Max Loss $20,000 $75,000 $150,000
Time Decay 1-day 10-day
Max Loss $25,000 $100,000
Trading Ideas
Your objective is to make money. Your final P&L will not impact on your grade but it should
provide you with an indication of your performance. Here are some tips and ideas to get you
started but theses are just some of the possible avenues that you can explore. The Lecture notes
and the recommended readings will provide you with all of the relevant literature. Remember,
your grade will be awarded on strategy rationale, the implementation of that rationale and on
your subsequent examination of your experience.
1) Volatility trading, do you believe that implied volatility is too low or too high? Assuming
you do, there are many different ways to capitalize on your belief.
2) Payoff construction. You believe that the stock will behave in a certain manner over a
period of time. Construct an option/stock strategy to develop this idea.
3) Relative cheapness/richness. You believe that one option/stock is cheap relative to
another.

Don’t forget that the simulation exercise allows you to experiment and demonstrate with your
theoretical understanding gained from the lecture series. You should also draw from
contemporary macro-economic and corporate news information to inform your trading ideas.

Requirement
You should have a maximum of 4 strategies. All strategy constructions are at your discretion with
one exception. It is expected that you will implement a portfolio (book) that is gamma neutral. I.e.
You will create a book called gammaStrategy (say) which should be gamma neutral. See your
lecture notes for more details.

Grading Guidelines
Fundamental awareness you should have some idea on how you expect the stock to perform.
This can include a qualitative and/or quantitative approach
Volatility Strategy Volatility is the most important factor as it is the only variable that we
cannot control. You should have view on what you expect the
volatility to do.
Risk Awareness You should note the risk of your entire portfolio. Excessive risk will
be penalised.

Policy on Plagiarism: Plagiarism will be dealt with according to University of Limerick

Academic Regulations.