Financial Risk Management

Bull (Call) Spread, Bear (Put) Spread, Straddle, But (Pull) Spread, Collar, Butterfly Spread
^^Those are some of the strategies that can be used and must be used with 5 different companies, such as Tesla, Disney, Walmart, Apple, Amazon (any companies are fine) those are just examples.
Requirement is that there must be a different strategy (bull spread / bear spread / etc.) for each company
FINALprojectFinanceResearch
ATTACHED FILE(S)
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FIN4486 – FINANCIAL RISK MANAGEMENT – FINAL PROJECT

DERIVATIVE STRATEGIES
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 should work in teams comprised by 5-6 students. If your team includes 6 students, you should
propose 6 different strategies.
A. QUALITATIVE RESEARCH
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 one year from now, 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).

B. QUANTITATIVE RESEARCH
• Using the Excel spreadsheet we have used in class, 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).
1. 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.
2. 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.
3. What are the stock prices that result in your maximum gain and maximum loss? What
is the maximum profit and maximum loss?
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4. 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:
https://finance.yahoo.com/quote/TSLA/options/).
5. A sample spreadsheet is attached for your convenience. It is the same solved during
class and uploaded to the Weekly Module. 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.

C. CONCLUSION
1. 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
(a).
2. 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.
3. 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 had decided in A.2 ….. Go ahead! …
However, please follow the same steps as in B.1,2,3 …. The screenshots of the stock
prices are needed.
https://finance.yahoo.com/quote/TSLA/options/
Money Spread (Bull-Call)
Strike1 Strike2
X1 X2
Instrinsic Values June 125 ./ 130
ST C1 C2 Profits Contract
75 0 0 -2.15 -215
80 0 0 -2.15 -215 Premiums
85 0 0 -2.15 -215 C1(t0) C2(t0)
90 0 0 -2.15 -215 13.5 11.35
95 0 0 -2.15 -215
100 0 0 -2.15 -215
105 0 0 -2.15 -215
110 0 0 -2.15 -215
115 0 0 -2.15 -215
120 0 0 -2.15 -215
125 0 0 -2.15 -215
130 5 0 2.85 285
135 10 5 2.85 285
140 15 10 2.85 285
145 20 15 2.85 285
150 25 20 2.85 285
155 30 25 2.85 285
160 35 30 2.85 285
165 40 35 2.85 285
170 45 40 2.85 285
175 50 45 2.85 285 Steps
180 55 50 2.85 285 0 Buy Low Strike
185 60 55 2.85 285 Sell High Strike
190 65 60 2.85 285
Steps
1 Calculate the intrinsic value of call options
2 Calculate the profit of our portfolio (Bull Spread)
3 Adjust for contract size
75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165 170 175 -215.00000000000003 -215.00000000000003 -215.00000000000003 -215.00000000000003 -215.00000000000003 -215.00000000000003 -215.00000000000003 -215.00000000000003 -215.00000000000003 -215.00000000000003 -215.00000000000003 284.99999999999994 284.99999999999994 284.99999999999994 285.00000000000011 285.00000000000011 285.00000000000011 285.00000000000011 285.00000000000011 285.00000000000011 285.00000000000011 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165 170 175
X1: Strike of Low-Strike Option
X1: Strike of High-Strike Option
In this column, type all the possible stock prices
you belive the stock price could have when you close your portfolio
P1: Premium of High-Strike Option
P2: Premium of Low-Strike Option
This is from
https://finance.yahoo.com/quote/WMT/options/
In Yahoo Finance you can find the option prices and strikes
for other stocks
https://finance.yahoo.com/quote/WMT/options/
These possible stock prices
must be arranged from lower to higher
Strike and Premium (Last Price)
Money Spread (Bull-Put)
X1 X2
DCRB June 125 ./ 130
ST P1 P2 Profits Contract DCRB 130
P1(t0) P2(t0)
11.5 14.25

Steps
1 Calculate the intrinsic value of put options THIS IS A PUT BULL SPREAD
2 Calculate the profit of our portfolio (Bear Spread)
3 Adjust for contract size
Spread
Contract
Money Spread (Bear-Put)
Strikes
X1 X2
DCRB June 125 ./ 130
ST P1 P2 Profits Contract DCRB 130
Premiums
P1(t0) P2(t0)
11.5 14.25

Steps
0 Buy High Strike
Sell Low Strike
THIS IS A PUT BEAR SPREAD
Steps
1 Calculate the intrinsic value of put options
2 Calculate the profit of our portfolio (Bear Spread)
3 Adjust for contract size
Spread
Contract
Money Spread (Bear-Call)
STRIKES
X1 X2
DCRB June 125 ./ 130
ST C1 C2 Profits Contract DCRB 125
PREMIUMS
C1(t0) C2(t0)
13.5 11.35

Steps
1 Calculate the intrinsic value of call options THIS IS A CALL BEAR SPREAD
2 Calculate the profit of our portfolio (Bear Spread)
3 Adjust for contract size
Spread
Contract
Collar
Call Put Price Initial S P Long Stock
13.65 13.65 125.94 Long Put
Short Call
K Price
Robinson: Robinson:
Call Strike Price
K Price
Robinson: Robinson:
Put Strike Price
136.165 120
Selling Buying Buying
Call Value Put Value ST Call Profit Put Profit Stock Profit Overall Contract Stock *100

Steps
1 Calculate the intrinsic value of options and gains from stock THIS IS A COLLAR
2 Calculate the profit of our portfolio
3 Adjust for contract size
Butterfly Spread
X1 X2 X3
DCRB June 120 125 130
C1(t0) C2(t0) C3(t0)
16 13.5 11.35
BULL SPREAD BEAR SPREAD
ST C1 C2 Profits Contract C2 C3 Profits Contract Butterfly

Steps
1 Calculate the intrinsic value of call options THIS IS A CALL BEAR SPREAD
2 Calculate the profit of our portfolio (Bear Spread)
3 Adjust for contract size
Straddle
Call Put Price Initial S P
13.5 11.5 125.94
K Price
Robinson: Robinson:
Call Strike
K Price
Robinson: Robinson:
Put Strike
120 120
Call Value Put Value ST Call Profit Put Profit Overall

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