Part I: (25 Points)
Construct an index.
The index can hold any investable asset, but the assets must be liquid and current market prices must be readily accessible.
Describe how the components of the index are chosen. How often will the composition change? (This process must be systematic.)
What type of product is it?
Long-short (120% long-20% short or 80% long-20% short as an example)
How are the weights of the components calculated? Options include:
Build a monthly historical index to the extent that it is possible.
Provide average returns, standard deviations, Sharpe ratio, alpha and beta.
Provide a chart of the index along with rolling returns, standard deviations, and betas.
Part II: (25 Points)
Create a financial product based on the index.
The product will be based on the index but should be designed so that it is different from other available product. (Spice it up.)
The process should be rules-based and quantitatively driven so that it can be run systematically. Variations can include:
Part III: (25 Points)
Create a structured product based on your financial product.
Structured products may or may not have a finite life – depending on the structure.
These products are “OTC” – and marketed directly to customers of the bank/broker.
We will use options to enhance or protect our financial product.
Variations can include:
“Covered” products – selling a call option against the index
“Protected” products – buying a put option with the index
“Partially protected” products
Part IV: (25 Points)
Discuss the risks inherent in the structured product.
Illustrate how this product will perform in various conditions. (You will have to use either/both Monte Carlo simulation and/or historical data.)
When will the product perform well?
When will it perform poorly?
Why buy this?