Case Study (FIN-325): Using Derivatives to Hedge International Portfolio Risk

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Case Study (FIN-325): Using Derivatives to Hedge International Portfolio Risk

Educational purposes only…

Purpose

  • To review and apply the theory of hedging and international diversification to real life examples,
  • To hedge an internationally diversified portfolio through derivatives,
  • To conduct a detailed research about international financial securities as well as hedging methods.
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    Rules

  • Trading Game is used for the portfolio formations.
  • You need to use one username for the entire case study (i.e. same username for all three sections/portfolios).
  • Your username for this case study must be unique to this case study (i.e. you cannot use a username you already had for other case studies).
  • Please note that the Trading Game uses Yahoo! Finance for all financial figures, financial statements, historical prices, beta, symbols, ticker codes, fund categories, ETF categories, options, futures, commodities, security names, countries and all other information pertaining to this case study.
  • If you submit this case study before the deadline AND you receive a grade of C or better then you can resubmit this case study for a second time (with a new username). There is no third resubmission.
  • You need to have a new username for the second submission.
  • Once you trade a security, it is reserved. It cannot be traded by anybody else.
  • You need to let me know when you are done so that I can grade your work.
  • All work will be graded immediately after the deadline. Trading Game will not allow you to trade after the deadline.
  • You can use Stata (completely voluntary) to trade or check your work.
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    Directions: Long Positions

  • (5 points) Maximum allowed funds (based on cost) for long positions is $250,000.
  • (5 points) Minimum allowed funds (based on cost) for long positions is $245,000.
  • Please make sure you have long trade positions in each of the following:
    • (10 points) at least 10 different country index funds (ETFs, i.e. BKF)
    • (10 points) at least 4 Foreign currency funds (ETFs, i.e. FXE)
    • (5 points) at least 1 foreign Treasury bonds (ETF, i.e. WIP)
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    Directions: Short Positions

  • (5 points) Maximum allowed funds (based on cost) for short positions is $250,000.
  • (5 points) Minimum allowed funds (based on cost) for short positions is $245,000.
  • Please make sure you have short trade positions in each of the following:
    • (10 points) at least 10 different country index funds (ETFs, i.e. BKF)
    • (10 points) at least 4 Foreign currency funds (ETFs, i.e. FXE)
    • (5 points) at least 1 foreign Treasury bonds (ETF, i.e. WIP)
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    Grading

  • You need to hedge both long and short positions.
  • Cost of options is NOT considered loss.
  • Cost of options is not part of your invested portfolio.
  • Choice of hedge is yours.
  • Your grade will depend on your success of hedging.
  • Point of the case study is to eliminate the risk of loss entirely.
  • For each $2,000 loss on the long positions, it will cost you 10 penalty points.
  • For each $2,000 loss on the short positions, it will cost you 10 penalty points.
  • Profits will receive no bonus, extra credit etc.
  • Grading towards course grade

    THIS ASSIGNMENT IS COMPLETELY VOLUNTARY.
    THIS ASSIGNMENT IS NOT PART OF OUR REQUIRED COURSE CONTENT.
    This assignment has a total of 100 points. 15% of these points can be added to any ONE of the exams.
    For instance #1: Let’s assume you received 100 on this assignment. Then, you can add 15 points to any ONE of your exams.
    For instance #2: Let’s assume you received 80 on this assignment. Then, you can add 12 points to any ONE of your exams.
    For instance #3: Let’s assume you received 60 on this assignment. Then, you can add 9 points to any ONE of your exams.