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Options, futures and risk management

Part A
Identify an option (in any market in the world) that you believe is mispriced. Explain, illustrate and justify clearly why you think the instrument is mispriced.
Develop an arbitrage, delta-neutral strategy that will profit from the mispriced derivative. Specifically,
detail the minimum costs of undertaking this strategy and pursuing it. You can use as much capital as you like. Given that the strategy is theoretically risk free, you should not lose any money anyway!
Every week you are responsible for adjusting your delta-neutral portfolio.
Make a record of all transactions and profit/loss ofthe strategy. You are required to show evidence of at least two adjustments (even if it was advantageous to close-out early – you can discuss this in your report).
Write a report detailing all yourtransactions and the rationale behind them.
Part B
Retrospectively, it is possible to determine if your beliefin the option you thought was mispriced in
Part Awas correct or not. Once you have completed Part A (requiring at least holding the position for3 weeks – one week you form the portfolio and 2 subsequent weekly delta re-balances) – go back and using historical data determine ifthe option was truly mispriced and
whether you took the correct positions to benefit from the mispricing. Discuss your methodology for examining ifthe option was mispriced
in your report and your interpretation ofthe results in this new light.
The report must document a list of transactions and dates they were executed. The document must then discuss everything from the process including such items as:
Transaction costs used for all transactions, with evidence that it is a realistic figure
Howthe mispriced options were identified How risk neutral
portfolios were formed and why
Explanations and reasons forthe performance
When would have been the best time to close out positions
Howthings could have been improved
Re-validation ofthe mispricing identified earlier
The above items will form the crux
of what you will be assessed on, along with presentation and concise writing skills