A manager of a firm will usually deal with two kinds of risk: (i) Business Risks and (ii) Financial Risks.
Financial risk management deals with the proper assessment and response to the latter of the two. In
the field of investments, there is an abundance of strategies allowing an investor to “design” payoff
profiles where losses (and/or gains) are limited. Over the course of the last weeks, we have learned
several of these strategies.
The goal of this project is to combine the theory we have learned with the practice. Students will
propose 5 different investment strategies and subsequently compare the expected payoff/profit
diagram with the realized profits or losses. The strategies must involve derivatives (i.e. Bull (call)
spread, Bear (put) spread, straddle, …)
**You can work in teams comprised by up to 6 students. We organized study groups some time ago.
If any change to any of the teams is needed, please send me an email requesting the change.
You should include a qualitative analysis where you describe the five strategies selected by
the group. For each strategy, please explain:

  1. The market setting in which your selected strategy incurs in gains or losses (i.e. if you
    follow a bear spread, do you gain or lose if markets go up/down… do you gain or lose
    if markets move slightly or if there are wide market swings).
  2. The holding period of your strategy (i.e. you will form a bull spread today and you will
    close it on Friday next week….. Please note you can buy derivatives with longer
    durations. That is, you can buy a call option that expires in 2021 even though you are
    planning to close your position on Friday next week).
  3. Any expected-events or the overall situation of the underlying stock(s) during the
    holding period of your strategy (i.e. WMT is expected to announce earnings or TSLA
    has experienced large price swings recently due to…).
  4. Include a brief SWOT Analysis for each underlying firm.
  5. The strike price(s), premiums (cost) and expiration of your options.
    *You can repeat the same firm in more than one strategy, but make sure to choose at
    least five firms in total.
    *The qualitative analysis must be at least 2 pages (single-spaced and typed).
     Using the provided Excel spreadsheet as template (you can use a different template as well), please
    plot the profit diagram for each one of your five selected strategies. Recall that to calculate
    profits you must reduce the option premiums from your overall payoffs (same as we have
    done in class).
  6. Please include a screenshot of the option chains (list of prices) showing the actual
    option strikes, expiration and premiums (prices) you are selecting for your project.
  7. Please include a screenshot showing the stock price at that time and the date when
    you get this information. This date is the date of “formation” of your strategies.
  8. What are the stock prices that result in your maximum gain and maximum loss? What
    is the maximum profit and maximum loss?
    Page 2 of 2
  9. Plot profit diagram keeping in mind you can only buy/sell options in contracts
    controlling 100 shares each. Thus, always make this final adjustment by multiplying
    by 100 as learned in class. Please use a different sheet for each strategy.
    *Keep in mind you will be using the real values from real options (you can get the
    information from any source. For instance:
  10. A sample spreadsheet is attached for your convenience. It is the same solved during
    class and uploaded to the Module of Week 10, Chapter 8, under Class Notes and
    Recordings). Notwithstanding:
     Please make sure to carefully follow all steps as learned in class when
    preparing the profit charts.
     You can directly use this Excel spreadsheet for your project. However, please
    prepare a clean version of these charts removing notes or hints that were
    added during class.
  11. From the qualitative portion of the project, you have already selected the date in
    which you will close your positions. At that date, go online and get the updated stock
    prices for each one of your underlying firms: (a) You only need the stock prices at
    this point (get the screenshot of each stock price) …. You may also (b) look at the
    options prices directly as well, but doing so is optional, and does not substitute step
  12. Assume that you close all your positions. Calculate the profits/losses you have
    attained from each strategy in the same sheet where you had “forecasted” all the
    possible scenarios.
  13. Are your gains/losses within the range you had previously defined?
    *Ok, since we are likely dealing with American Options, let’s allow for early exercise.
    If you notice any of your portfolios have a good performance and you want to close
    your positions before the initial closing date you decide in A.2 ….. Go ahead! …
    However, please follow the same steps as in C.1,2,3 …. The screenshots of the stock
    prices are needed

Sample Solution