financialderivativesgroup5.doc

Financial Derivatives Investment Competition Final Report Lu Yang, Shen Yuan Yuan, Wang Meng Group Monday 12.30 5 This report is composed of three parts separately explaining initial choice for stocks, commodities and bonds. Then it tells the hedging process using options and futures. All of all, before we do the competition, our group members had a talk to determine which type of investors we were. It’s risk-averse and we want to avoid risks. Because it’s the direction to decide our investments’ components and hedging strategy. Then we should be prudential in choosing our components of stocks, commodities and bond. It is based on macro-economy, which are our knowledge of companies, world subjects and policies. Apart from macro-economy, we also need technical analysis. Both of these consist our views to the past events and current trends to determine which individual financial product we should purchase. Second, taking in charge of the process in which we hedge and knowing details of different derivatives’ contracts are the most thing we learn from this competition. Hedging acts as insurance to lower our initial portfolios’ market risk. But there is still too much risk in it, such as basisi risk we should notice seriously. Thirdly, we must consider adjustments of our financial products of which will be sold out in time in case of any changes in price which is the opposite of our determination during the 3 months. Basic rational of our investment portfolio is Markowitz portfolio which is less correlation meaning risk spreading less to each other. We diversify our risk within portfolio via 10 stocks of totally irrelevant different areas. As graphs 1 showing, the minimum variance portfolio is the goal we pursuit. Graphs 1 We attempt to calculate and refer to the Sharpe Ratio for measuring portfolio historical performance, Treynor ratio to compare well-diversified portfolios and Information ratio checkin