aod report v3
TRANSCRIPT
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CONTENTSFund Overview...........................................................................................................2
Executive Summary...................................................................................................3
Commodity Trades.....................................................................................................4
1. Corn Straddle.................................................................................................4
1.1 Investment Thesis.......................................................................................4
1.2 Strategy......................................................................................................4
1.3 Derivative Instrument Used........................................................................4
1.4 Execution....................................................................................................5
1.5 Payoff Analysis............................................................................................5
1.6 Other Learning Points.................................................................................6
2. 1. Crude Oil.......................................................................................................7
2.1 Investment thesis.......................................................................................7
2.2 Derivative Instruments Used......................................................................7
2.3 Execution....................................................................................................7
2.4 Payoff Analysisfor our trade........................................................................8
2.5 Other Learning Points.................................................................................8
3. Gold..................................................................................................................9
3.1 Investment thesis.......................................................................................9
3.2 Strategy......................................................................................................9
3.3 Derivative Instruments Used......................................................................9
3.4 Execution..................................................................................................10
3.5 Payoff Analysis..........................................................................................11
3.6 Other Learning Points...............................................................................12
Equity Trades...........................................................................................................13
4. Las Vegas Sands Corp.....................................................................................13
4.1 Investment Thesis.....................................................................................13
4.2 Strategy....................................................................................................13
4.3 News.........................................................................................................13
4.4 Payoff Analysis..........................................................................................14
Payoff Analysis
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Investment Objective
Our xxx fund invests primarily on theequities and commodities market. With theutilisation of derivative securities, we aimto achieve long-term capital appreciationwith moderate volatility and risk.
Market Overview
CommoditiesUnpredictable weather, natural disaster
and political instability have given rise tosupply shocks in the world of commodities.Greater affluency and the surge in demandfrom China and to a lesser extent, Indiaand the rest of Asia will increaseconsumption demand. With greateracknowledgment of commodities as aninvestable asset class, our team isoptimistic that this segment of the financialmarketswill continue to grow.
Equities
2 years into the financial crisis, equitymarkets even though on the route torecovery, are still a far cry from where theywere at the peak in the late 2007. Today,with optimistic data (unemployment,consumer confidence) coming out from theUSA, fuelled by the momentum of grow inthe Chinese and developing worldeconomies, our team believes that thereare still a lot of room for the equity marketsto run.
SALVIN LOOK HERE!
Fund Summary
Fund Performance
Fund Allocation (as at 19th
March 2011)
Fun
dOvervie
w
Launch Date 16th Feb 2011
Fund Size SGD 10,000,000
Total Returns 16.19%
NAV SGD11,691,053
MTD
change
YTD
change
S&P GoldmanSachs
Commodity
Index
1.82% 8.86%
Energy 4.18% 12.16%
Agriculture -3.74% 3.46%
Livestock 2.26% 4.33%
Precious
Metals 0.77% 1.43%
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This report will focus on how we utilized futuresand options trading strategies we have learntthroughout the course in conjunction with ouranalysis of macro-driven events to invest in theequities and commodities markets.
We have mandated our trading window to be at 4 weeks; and have set our expected returnsat an annualized rate of 20%.
Our team adopted a market driven investment strategy. Our priorities are to continue togrow our asset under management while seeking to balance between cost reductions andgrowth opportunities in these volatile markets. We successfully incorporated the use ofstructured derivatives into our trading ideas (straddle for long volatility and butterfly spreadfor short volatility etc) and have also utilized the concept of option Greeks to assist inhedging of our open positions.
Leveraging on our financial strength and aligning the business to the environment, wemanaged to obtain a 16.19% return on our portfolio, and its NAV stands at SGD11,691,053today. We also managed to unwind most of our positions as Cash and Cash Equivalent now
represents 65% of our portfolio allocation. The rest are held in stock, future options, futuresand options.
Top 5 Holdings Sector %
Apple Inc Technolo
gy
19.2
Gold Commodi
ty
8.2
Las Vegas Sands
Corp
Services 4.4
Dow Jones Index Index 1.6
Oil Crude Commodi
ty
0.1
Exe
cutiveSum
mary
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1. Corn Straddle
Com
modityTra
des
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1.1 Investment Thesis
In light of the highly volatile global
economy towards the end of February, we
felt it was a right time to diversify our
portfolio and venture into the future
options market of the agriculture sector.
Though we found our choices limited
merely to Corn Future Options, we still
proceeded and implemented a strategy
that could maximise returns in times of great uncertainty.
Our preferred options strategy was actualize based on several conflicting findings
regarding the outlook of Corn Futures.
In India, prices dropped on 25th February following healthy forecasts of supplies
from the major producing regions of Bihar and Tamil Nadu, propelling estimates
of maize production to 20.03 million tons for 2011, an increase of almost 20%from the 16.72 million tons of 2010.
On the same day elsewhere in the United States, Corn prices rose 3.7%, or 25.5
cents to $7.22 a bushel after the U.S Agriculture Department reported huge
jumps in export figures which were above analyst expectations.
Global supply squeeze due to bad weather conditions in major crop producing
regions such as Australia, China and Russia and increase demand from emerging
markets.
The impact the turmoil in Middle East has on Corn Futures prices is very
unpredictable. Firstly, food prices fell when the cost of oil spiked as people cut
back on food expenditure in anticipation of spending more on energy. However,an increasing proportion of world corn output is used to manufacture ethanol/bio
fuel, thus, if oil and energy prices increase, so would that of bio fuel and corn.
1.1 Strategy
Given the various factors exerting opposing effects on the price of Corn Futures, we
felt prices would swing either way. Thus we decided to bet on the volatility of the
prices and implemented a Straddle. The Straddle strategy involves buying an equal
amount of May corn futures call and put options with the same strike price.
1.2 Derivative Instrument Used
Corn Call Future Options
Corn Put Future Options
1.3 Execution
25 February 2011 May Corn Futures
Price: $7.22
er for 1000 May Corn Futures Put Options at $7.25pired, NOT Filled]-Enter order for 50 May Corn Futures Call & Put Options at X=$7.25
[Order Not Filled[Order expired, NOT Filled]
Figure 1.1: Graph of Corn Price
Source: http://www.traderslog.com/quotes-charts/?sym=C!
Figure 1.2: Timeline for Execution of Corn Trade
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We begin by placing orders for
1,000 call and put options for May
Corn Futures with strike price of
$7.25. The order expired and thus
could not be filled.
28 February 2011 May Corn Futures
Price: $7.23
We placed orders for 500 calls and
puts, and then 50 of each but they
all expired yet again. Thus, we
lowered the orders to match the
days volume of 3, and were finally
successful in executing the
Straddle.
1.1 Payoff Analysis
Our options position gave us
the following payoff table.
Based on the execution of ourtrade, we would be able to
profit if May Corn Futures
prices were either:
1) More than $8.23 OR
2) Less than $6.27
Due to the nature of StockTrak, we are not able to exercise any future options.
However, even if we were allowed to do so, our returns from the strategy would not
have been impressive. Our bet on volatility was right but the magnitudes of the
price movements were not sufficient enough to ensure healthy returns.
The May Corn Futures price went as high as $7.42 on 4 th March and as low as $6.08on the 16th before recovering to $6.84 on March 18, the day our team decided to
close our outstanding positions and seize any trading activity. If we had exercised
our options during the various extreme scenarios, our profits/losses would have
been a loss of 108.15 + 34.94 187.26 = (SGD 44.17)
1.1 Other Learning Points
The biggest take away from the execution of this trade can be attributed to the lost
we suffered due to our miscalculation of the price movements we needed to offset
the cost of the options. Although, our bet on volatility was right, the required $1
swings on either side of the initial May Corn Futures was beyond realistic
expectations. Given we entered into the Straddle at a very volatile time period, we
had to pay substantial amount of premiums in order to take on our desired position.
However, if we had been more meticulous in our initial estimations, we would have
realised that expected price fluctuations could not have covered these premiums.
-Enter order for 3 May Corn Futures Call & Put Options at X=$7.25[Order Filled Straddle in action}[Order expired, NOT Filled]
Figure 1.3: Payoff Diagram for Straddle
Figure 1.4: ???
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In addition, we misinterpreted the May Corn Futures and its respective Options
contracts in terms of the size stated in StockTrak. Given each May Corn Futures
contract represent 5000 bushels and the size of each Option is 50, we thought each
option contract should then translate to 5000 x 50 = 250,000 bushels of Corn.
However, it took us a while to realise that our initial understanding was not logical
given the price we paid for each option and that each Future Options carries the
weight of merely 50 Bushel of Corn.
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2. Crude Oil2.1 Investment thesis
The decision to gain exposure to Light
Sweet Crude oil was an opportunistic one
as we spotted a downward decline in
prices after stability in the political
situation in Egypt was achieved. Despite
near term bearishness, we believe that oil
is undervalued due to fundamental
demand from India and China we believed
that oil prices will continue rise.
2.2 Strategy
To gain exposure to the rising trend of oil
prices, we decided to buy into Crude Oil
Futures.
Despite this opportunistic window, we
want to avoid catching the falling knife
and gaining exposure as the markets
tank. As such, we have decided the cover
the downside risk with Put Futures
Options.
2.3 Derivative Instruments Used
Crude Oil Futures
Cure Oil Put Future Options
2.4 Execution
In terms of execution, the trade was not
so smooth.
On 16th February, we managed to
successfully gain exposure through 200
lots of Crude Oil March Futures. However,
our corresponding put position was not
filled.
On 17th February, in order to more
effectively hedge our futures position, we
decided to delta hedge our position. We
calculated that the delta of the put
options was approximately
On 22nd February, the Crude Oil March Futures position expired. However, we were
unable to sell off the options futures position 0.50, and decided to buy into 400 put
option. The order was successfully
filled.
-Enter order for 200 April Put Options Futures at X=$84
[Order NOT Filled]
Entry: $84Entry: $84
10%
-Unable to enter sell order for 400 April Put Options Futu
[Order NOT Filled]
Figure 2.1: Graph of Crude Oil Price
Figure 2.2: Timeline for Execution of Crude Oil Trade
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2.5 Payoff Analysisfor our trade
Overall, our speculative trade with a hedge on downside risk was successful and we
managed to net an overall profit from the strategy of $1,723,787.
However, we would like to highlight that the profit from the strategy was dampenedbecause we were unable to exit our future option position due to constraints of
using Stocktrak.
2.6 Other Learning Points
Why not dynamic hedging? For our trade, we decided to use delta hedging to
more effectively hedge our downside risk. However, instead of dynamically hedging
our position, we chose to use the hedge-and-forget method instead. The reason for
this is because dynamic hedging is far too expensive because the need to rebalance
the portfolio to maintain delta neutrality becomes prohibitively expensive when
taking into account the transaction costs incurred on trade. It is much more feasiblefor a large portfolio of options, where only one trade is necessary to zero out delta
for whole portfolio. Hedging transactions cost are absorbed by the profits on many
trades.
Furthermore, we feel that this hedge is effective because if crude plunges, the delta
of our put option would increase to provide us with higher downside protection than
what is required for our futures. On the flipside, if crude rises, the delta of our put
option decreases which minimizes the dampening on profits
Qty Cost of
Execution
P&L at
Maturity
Future
s
200 -10
(Commission)
2,212,282.7
0
Option 400 -488,494.80 -488,494.80
Overall 1,723,787.9
0
253% Gains
Figure 2.3: Pay-off from Crude Oil Trade
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3.
4. Gold4.1 Investment thesis
Metals are considered havens in times of turmoil. With the political situation taking
place in Egypt during the trading
period, we felt that it was a good time
to increase our portfolio exposure by
investments in Gold future options. As
the price of WTI crude continued to rise
with the heightened political situation inEgypt, Gold prices similarly increased at
alarming rates.
We were keen on taking a long position
in the Gold futures options market
because we did not see the political
situation in Egypt ending anytime soon.
Speculation in the market is expected
to drive the prices of Gold higher.
However, we also acknowledged thatGold prices over the last few months
have been relatively lower with its
resistance line at 1425. Thus, despite wanting to take a long position in Gold
futures, we were also aware of the downside potential associated with it.
With a general long position in the Gold futures market, and the expectations of
prices exceeding 1435 at least in the month ahead, we decided on a strategy that
allowed us to take a heavier weightage on a long position but at the same time, to
take safe on the downside risks involved.
4.2 StrategyThe strap strategy is almost like a straddle, but it involves us buying a number of at
the money puts as well as twice the number of calls of Gold at the same strike price
and expiration date. This is because we are expecting more volatility in the near
term with Gold prices likely to move upwards instead of downwards.
4.3 Derivative Instruments Used
Gold Put Future Options
Gold Call Future Options
Figure 3.1: Graph of Gold Price
Source: http://www.traderslog.com/quotes charts/?sym=GC!
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Enter order for 300 April Gold Futures Call Options at X = $1435
[Order expired, NOT filled]
-Enter order for 300 April Gold Futures Call Options at X = $1435[Order expired, NOT Filled]
-Enter order for 150 April Gold Futures Call Options at X = $1435[Order Filled STRAP in Action]
4.4 Execution
2nd March 2011
Current Gold Price: 1437.2
Number of Gold April Put Options Purchased : 150
Strike Price: $1435
Contract Size : 100
Price paid per option : $23.60
Exchange Rate: 1.28
Commission: $10
Total costs= 150100$23.601.28+$10=S$453,130.00
-Enter order for 150 April Gold Futures Call Options at X = $1435[Order Filled]
Figure 3.2: Timeline for Execution of Gold Trade
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We chose a strike price of $1435 because the exercise prices available on Stocktrak
only allowed us to work with prices with multiples of 5. Also, on that day, we wanted
to purchase 300 Gold Future Call Options for April to structure our strategy,
however, our order was not filled. In the subsequent days ahead, we were still
unable to fill our order of 300 Gold Future Call Options for April.
9th of March 2011
Trade 1
Number of Gold April Call Options Purchased: 150
Price Paid per option: $14.30
Exchange Rate: 1.28
Strike Price: $1435
Total Costs = 150100$14.301.28+$10=S$274,570
Trade 2
Number of Gold April Call Options Purchased: 150
Price paid per option: $15.30
Strike Price: $1435
Total Costs = 150100$15.301.28+$10=S$293,770
As we had problems filling our orders for our call options, we decided to split the
orders and we managed to implement our strap strategy fully. Both trades took
place during different times of the day, and hence the difference in the price paid
for the call options. We finally managed to execute the STRAP for gold futures on 9
March 2011.
1.1 Payoff AnalysisNumber of Options Price per option Exchange Rate Commission Total Cost Date of Purchase
Buy April Put Future Option at 1435 150 23.6 1.28 10 (453,130.00)$ 2/3/2011
Buy April Call Future Options at 1435 150 14.3 1.28 10 (274,570.00)$ 9/3/2011
Buy April Call Future Options at 1435 150 15.3 1.28 10 (293,770.00)$ 9/3/2011
Total Cost Involved (1,021,470.00)$
Profitability Gauge
Figure 3.3: Payoff Diagram for Gold Trade
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Based on the fluctuations of the Gold April Futures prices from March 9 th 2011
onwards, we realised that we would not have been profitable despite the
fluctuations in the prices. We took our evaluation
on the 13th of March 2011. This is because based
we purchased our options at a relatively high cost
and the price fluctuations of Gold during the
period in which we were holding our long position
in April Gold Futures would not be able to satisfy
any situation in which we would have been able to
profit.
Reflected on the website is our current P/L based on the changes in the value of the
options in our Long position. On 13th March, the value of our future options on
Stocktrak is as follow:
Quantity Price Paid Last Price P/L
April Gold Call
Options
300 14.80 11.90 (87,000)
April Gold Put
Options
150 23.6 26.1 37,500
Net P/L (Local
currency)
(49,500)
Based on the given information, we realised that for our position on Gold April
Futures, we were not able to be profitable in both situations:
1) Exercising of futures for profit gaining
2) Option trading in which we only focused on the value of the options.
1.1 Other Learning Points
Our biggest learning point for this particular trade is that for inexperienced traders,
it is always important to cover our downside positions. Although we believed that
the Gold futures prices will have risen based on the political situation in Egypt and
the increasing investment in metals as a safe haven, we were fortunate to cover our
downside and to limit our losses to $1,021,470. Should we have purchased call
options alone and taken a large long position on gold futures, we would have mademuch higher losses.
Another learning point was that after doing any fundamental and technical analysis,
it is important to firstly create a payoff table and then decide to purchase which
options based on the prices at that point of time. It was only after we purchased the
options that we realised that we would have only been able to profit if prices were
either more than $1461.60 or lower than $1381.80 ad this would have been hard to
achieve based on the analysis that we made on Gold as an investment. The payoff
table would also have allowed us to realise the absolute amount of losses that we
would have to bear and this could have better allowed us to plan our asset
allocation strategy.
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2. Las Vegas Sands Corp.
2.1 Investment Thesis
Integrated resorts developer Las Vegas Sands Corp. (LVS) posted strong earnings results inSingapore with revenue exceeding $1.02 billion since the start of opertations. In the comingquarter, most of their remaining elements in Marina Bay Sands including the ArtScienceMuseum and Light and Water show will be launched. Also, with the recently crowned Asiabest MICE Hotel title, we believe that this will drive additional visitation and produceincreased earnings. This is coupled with news that the company sees expansion in Spain.With the global economy picking up from the recession and its exposure to Asia, we believethat LVS will be a strong buy.
2.2 Strategy
Although the stock is listed on the New York Stock Exchange (NYSE), we constructed ahedge by shorting the Dow Jones Industrial Average (DJINDU) index futures as the NYSEindex futures are not available. To determine the optimal number of futures contracts toshort, we used the formula below:
Thus, we shorted 7 futures contracts to reduce market exposure for the LVS position. Wenote that this hedge is hardly perfect since LVS is not a component of the DJINDU and weare only not hedging a wide portfolio. With the worsening Middle East crisis and volatilecommodity markets, we maintain a bearish stand on the equity markets. In view of this, our
hedge is in fact a two-pronged strategy to limit our systematic risk while aiming to profitfrom the retreating index.
2.3 Derivative Instruments Used
NYSE Index Futures
Las Vegas Sands Put Options
2.4 News
Unfortunately, SECcommissioned aninvestigation into thecompanys Macau operationsover an alledged bribery case.This happened a week afterwe bought into LVS. The newscaused LVS share price toplumment and we madesubstantial overnight lossesof about 8%. Our hedge didnot protect us against thisunsystematic risk.
Following this, we decided to shift our strategy towards buying put options on LVS to limitour downside risk. We still maintained bullish on the stock but are very wary of the
Equ
ityTrades
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uncertainties in the near term. Using the volatility calculator, we determine the number ofput options to buy:
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2.5 Payoff Analysis
In the end, we bought 19 put options withstrike price of US$38 at a price of $4,578.59.This protective put strategy worked and welimited our losses on further falls in LVSprices.
Although we hedged the downside of LVS using put options, we decided not to close ourDJINDU futures short positions because of the bearish view on the equity markets after theMiddle East crisis worsened.