|
| Dr. Thompson Home | Corporation Finance | Commercial Bank Management | Insurance Operations |
| Risk Management | Personal Finance | Contact Dr. Thompson | |
Futures and Options - Finance 4140/5140
Dr. A. Frank Thompson Spring 2015
2005 Bartlett Hall E-Mail: actuary1@uni.edu
.
Office Hours: 2:00 PM to 3:25 PM TTH by appointment or e-mail
.
Course Credit Section Time Location
Fin 4140/5140 3 03 3:30-4:45 PM TTH CBB 28
Class meetings will be on Tuesdays and Thursdays.
.
Required Course Materials:
Daniel R. Siegel and Diane F. Siegel, Futures Markets, (Dryden Presss: Hinsdale, Ill, 1990) . [DS = Siegel text]
HP-10B calculator
Michael Lewis, The Big Short, Inside the Doomsday Machine, (W.W. Norton, Inc.: New York, NY, 2011). [ML = Micheal Lewis Book]
Lawrence A. Cunningham, How to Think Like Benjamin Graham and Invest Like Warren Buffett, (McGraw-Hill Publishing: New York, NY, 2001). [LC = Cunningham Book]
Joel Bakan, The Corporation: The Pathological Pursuit of Profit and Power, (Free Press, New York, NY, 2005), In lieu of reading the book, you may watch the movie that was based on this reading. [JB = Bakan Book]
Frank Partnoy, FIASCO: The Inside Story of a Wall Street Trader, (Penguin Books, New York, NY, 1999) . [FP = Frank Parnoy Book]
Lowenstein, Roger, When Genius Failed: The Rise and Fall of Long-term Capital Management, (Random House Publishing, New York, NY, 2000). [LR = Lowenstein Book]
Note: You will need to read all of these materials, be ready to discuss them and answer questions related to them on course exams.
Additional Reference Material:
Michael Lewis, Liar's Poker, (W.W. Norton, Inc.: New York, NY, 2010) [reprint edition] [LP - Liar's Poker]
Michael Sincere, Understanding Options, (McGraw-Hill: New York, NY, 2007).
Brian Burns, Trading Stock Options, (P&L Publications: New York, NY, 2009).
Rod Library Basic Reference for Security Valuation Research: http://www.lib.uni.edu/ris/business/
Recent Research Papers Relating to Financial Risks and Issues in Corporate Finance:
(2) Current Perspectives on the Actuarial Adequacy of PBGC
(5) Wal-Mart's Industrial Bank as a Clearing Mechanism for Credit Cards
(6) Spring 2007 Midwest Meeting Presentation: SPIC Problems and Prognosis
(7) Fidelity Insurance: Are There Differences in Experience Among Financial Institutions?
(8) Homeowner's Equity: Providing Lifetime Annuities for the Elderly
(9) Immunization of Pension Funds: Sensitivity To Actuarial Assumptions
(10) Auditor Concentration in the S&L Industry
(11) Analysis of PBGC's Deficit and Scenarios in Determining Adequate Premiums to Cover Claim Experience
(12) Analysis of the Underwriting, Premiums and Reserving for the SIPC Using a Control Theory Approach
Schedule of Learning Activities
For the Week of: Material Reading/Research Problem Assignment
Overview of Investing Fundamentals -How Securities are Values and Priced
January 13th Chapters 1 & 2 ----LC Exploration of Financial Efficiency and Externalities Associated with the
Pricing of Securities
Financial Management Journal Article on Coupon Equivalent Yield
Employee Benefits Journal: Pension Reporting Under ERISA
PBGC Article in Journal of Public and Municipal Finance Dealing with PBGC Externalities
New York Times Article Citing Research on PBGC Externalities
Rob Library Financial Databases Reference Guide by Stan Lyle Business Librarian
January 20th Chapters 1 --- DS Introduction to Futures Contracting -- History, and Development of Financial
Futures, Differences in Market Participants Problems 3,4,6,8,10
You must have declared your case team, consisting of no more than 4 members, prior to the start of class on January 20th. You may make such a declaration by sending me team information at my e-mail address: actuary1@uni.edu
Those who are not on a case team as of January 20th will be assigned to either a new case team or one of the others already developed. Each case team will provide a listing of members, along with their e-mail addresses, and the name of the team case faciliator when making their declaration. This case team information will then be used to communicate important material on the case assignment, lectures and problems.
Financial Ratios -What Do They Mean? by Deloitte & Touche LLP
Janaury 19th is a University Holiday Celebrating the Contributions of Dr. Martin Luther King
Completion of the process of formulating Financial Futures Study Teams and Presentation Groups
January 27th Chapters 1-4 ---FP and Chapter 2 DS --- The Appropriate Pricing of Futures Contracts
Problems 1,2,5-7,10,11,13
February 3rd Chapters 4-11 ---LC --- Determining a Reasonable and Effective Set of Investment Rules
For Buying and Selling Securities
Assignment 1 [100 points]: This key research assignment will require you to develop a set of investment guidelines for determining (1) what consitutes trading rules for buying and selling financial securities, (2) how existing positions are to be managed with a focus on risk management and (3) the frequency and extent to which portfolio results will be conveyed to your clients. After presenting your investment guidelines, you will then defend each position and provide a justification on why adherence to them will reduce financial risk, when preserving capital while generating a positive rate of return over the long run. [Due Tuesday, February 17th, 2015]. All future portfolio assignments, as well as, your final case project will depend on your developing a clear, concise, cogent, and defensible set of investment guidelines. Investment guidelines are absolute essential for developing a successful and disciplined investment program. If you are to become a successful investor, you will need to first create a transparent, logical, common sense set of investment guidelines.
NOTE: For further, even more compelling evidence, of why investment guidelines are crucial to investing you may wish to review the value changes in the UNI Krause Challenge portfolio since inception. Such a review will show some compelling evidence of how by mathematical modeling, sans investment guidelines, a managed portfolio went from $100K to just under that amount in the span of 10 years. Any institution that is taking money on behalf of another has a fiduciary responsibility to develop a set of investment guidelines, rules for periodically communicating performance to clients, and procedures in place, to evaluate performance and make changes in keeping with the client's best interests. Lacking such rules and guidelines when providing financial advice may be an open invitation for legal liability should a client be unhappy with investment results.
Initial Background to our Portfolio Case Assignment Spring 2015
Basis Information for the Spring 2015 Portfolio Case
The following is a list of focus stocks from which each team may choose one as their target security to evaluate against the current investment portfolio:
BX RCKY ANCI SDRL RIG NE IBM NOV COP SPLS CVX XRX
Each case team will select a stock to study to be used in examining one of four different option strategies associated with the course reference portfolio. you must declare which stock you wish to research against the client portfolio no later than February 3rd.
February 10th through 24th Chapter 3 --- DS --- Applications of Risk Management in the Use of Financial Futures
Problems 1-3,5,8
Risk Management and the Use and Abuse of Financial Futures and Options
March 3rd Chapters 1-6---JB and Chapters 1-3 LR ---Assessment of Investor
Risks Associated with the Use of Futures and Options
Derivative Pricing Risk [FP] Ch. 5-9
Canadian Institute of Actuaries Presentation on Techniques for Analyzing Financial Institution Risks
March 3rd through March 17th Difficulties of Relying too much on Mathematical Models: [LR] Ch. 1-5
Thursday, March 12, 2014
Exam I [100 points over the fundamentals of futures and options, first set of lecture notes,reading materials and regulator framework]
Establishing Rules That Recognize Fiduciary Responsiblities and Trust [LC Ch 12-14]
Spring break begins on March 16th and ends one week later on March 23th at which time we start in-class presentations by the research groups.
Spring 2007 Midwest Meeting Presentation: SPIC Problems and Prognosis
Some Perspectives on Pension Valuation and Funding
In-Class Presentations: April 8th through April 29th
Assignment 2: [100 points] Each Financial Futures Team will make a 50 minute, in-class presentation evlatuating their selected stock within the target portfolio. The team will provide a written paper, an analysis focusing on the suitability of this security within the portfolio, a set of excel spreadsheet models used to evaluate the portfolio and develop appropriate strategies, and a statement as to whether positions within the portfolio should be sold, bought or held at its present level. If the suggestion is to acquire more of this stock, a case must be made as to which of the other securities in the portfolio should be sold to raise cash to fund the new position. While it is important that every investor have a certain proportion of cash/near cash against major market down drafts, for purposes of this case, these funds are found outside the portfolio and so any repositioning will be done through restructuring, as opposed to borrowing against a cash/near cash account. You may use margin, however you will need to consider risk and tax implications and whether your proposed purchase is in keeping with your investment guidelines. Keep in mind that the nature of this course is to look at alternative ways to take one particular course of action and to identify which will provide the best results with minimum risk to loss of principal.Immunization of Pension Funds: Sensitivity To Actuarial Assumptions
Lecture Note on Efficient Markets: A Major Premise to CAPM
Financial Analysis/Portfolio Managment Project: Further Background on Assignments 1 and 2
As part of this course, you will develop a detailed analysis of a publicly traded stock in relation to the case portfolio. Each Financial Futures Team will work on evaluating one of the positions in the target portfolio in relation to the other holdings. You will need to demonstrate the effective use of option strategies to hedge, take or make positions in securities, and minimize portfolio risk while accentuating reward possibilities. Whatever strategies are used, you will need to incorporate the greeks, and historical backtesting to show how the use of options might enhance the case portfolio.
There are several library/reporting service references available to you: Moody’s Online, Research Insight, Valueline, CompuStat, SEC/EDGAR, Standard and Poor’s Reports. You should try to consult each of these sources to determine independently the background on the company you are analyzing. This executive report will be no longer than 15 double-spaced typed pages, including bibliography, charts and spreadsheet analysis, a preamble with the set of investment guidelines, risk tolerance, and disclaimers with respect to the client services provided by the team. . You have a portfolio consisting of stocks currently worth $1,000,149.40 that are mostly long term holdings for capital gains purposes with the exception of the options. With this exercise you are to evaluate the current position of the portfolio in terms of gains and losses, whether to buy, sell or hold it, and arguments favoring your position based on a profile of your client. Since you have held the positions in this portfolio for over a year, there are minimal capital gains tax implications, but you analysis should include an evaluation of any trade within the context of long term tax minimization. When evaluating this portfolio you should also consider that annual dividends are being derived from the current positions and are taxable at 15% under the current tax code and that this tax would be less than similiar income derived from interest. Originally this portfolio had a beta of around 1.2 at the beginning of last year, but most likely this number has changed so you should look at the beta for each holding, as well as, the current portfolio beta. You are to examine your target stock [the one selected for analysis] and determine whether it may be suitable for retention or exclusion in this portfolio. You may find that the analyzed stock is not one that you could recommend. In either case you need to make a reasoned argument on the basis of your set of investment guidelines for the trust, tax situation for the indivdiual investor, subjective and objective analysis for your recommendation and market conditions. You should be able to recommend at least two possible option trading strategies and be able to vigorously defend your positions. . Major positions in this portfolio are in the following stocks:
GE BRKB COP EMR JNJ MSFT MMM PG DNP T
You will be expected to use CAPM, DCF, Bond yield plus risk premium, Black-Scholes, Financial Ratio Analysis, fundamental and technical analysis to support your claim either way to adding or avoiding your selected company. In addition, you should clearly state your investment guidelines and demonstrate how your position is consistent with those directions. Please use the University Chicago Manual of Style and Form to report your research findings. Grading will be based on how well you present your results in terms of the integration of both quantitative and qualitative results.
April 7th through April 14th 4 Options Trading Strategies for Reducing Portfolio Risk and Increasing Return
Selling a Call, Buying a Put, Collars and Straddles
In-Class Presentations of Option Trading Strategies April 14th through the 28th
Exam 2 covering the basics of options trading with applications to equity hedges - April 16th
Assignment 3: [100 points] Each Financial Furtures Team based on an analysis of the target portfolio along with your selected stock, will develop a set of option trading strategies designed to reduce risk and at the same time generate additional income for your client. Explain under what conditions this strategy will either make or lose money, and why you believe it is more likely to generate a return without causing loss of principal to the portfolio. With each option strategy provide a sensitivity analysis to show under what conditions the options position will make or lose money, and indicate what alternative strategies will be used to minimize risk from options trading. This analysis should include what are the threshold points where you would unwind a position if it were to start losing money. In addition, it is important that you provide a logical argument as to why this investment is far superior to leaving the current portfolio in place without the use of options.
Final Exam: Tuesday, May 5th, 3-4:50 PM in CBB 28 [100 Point Essay Exam -- 3 questions out of the 5 presented during the last week of review on April 22rd or alternatively a team case presentation using a spread strategy]
Grading Information:
Grading Policy: Your course grade will be based on (1) accumulation of total points from exams, quizzes, homework and outside assignments, (2) meaningful class participation (3) work class projects and (4) voluntary extra credit assignments..
Grades will be determined by taking the highest student score and then applying grade lines using a 2% incremental standard from 100% based on the average of the three exams in the class.
The usual caveats with respect to this class are the same as with any UNI course. Students are expected to be familiar with the rules of the University and College concerning its academic ethics policy. You may obtain a copy of this policy through the Undergraduate Programs Office in Room 321B of the Business Building. With respect to any outside assignments, you are expected to fully cite the work of others. Any work turned in for this course whether a regular assignment, or extra credit project, will be deemed subject to this policy. Failure to fully cite the work of others in an assignment turned in for this course is plagarism and will result in a class grade of F.
Special Needs Considerations: UNI is an Affirmative Action Equal Opportunity Institution. The Americans with Disabilities Act of 1990 provides protection from discrimination for qualified individuals with disabilities. Students with a disability, who require assistance, will need to contact the Office of Disability Services (ODS) for coordination of academic accommodations. The ODS is located in 213 Student Services Center. Their phone number is 319/273-2676.
If you are absent from class due to a university event, you will be responsible for obtaining notes and making up any lost time on classroom assignments. Under these circumstances you are entitled to a make-up exam, which must be completed no later than 7 days after missing this assignment. However, with respect to written work which may turned in via e-mail attachment, these assignments are due on the date scheduled, and just as with an expiring option, an assignment that is not turned in on time will be considered incomplete and worth 0.
However, in extenuating circumstances there may be very good reason for relaxing these requirements. Therefore the faculty reserves the right to make a decision that might improve the grading position of a student should conditions warrant, but nevertheless alter policy in such a way that a student receives a grade less than what they have earned in the class.