Transcript Welcome to the Hedging Tournament

Hedge Tournament
Welcome
to the 16th McIntire
Hedge Tournament
Rules of the Tournament
Official source – Do not print!
(c) 2002-2015 Stefano Grazioli & Bill Wilhelm
Learning Goals
Help you learn broad & valuable skills that
will help you in your career
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How to use IT to solve business problems
Thinking algorithmically
Accessing enterprise data
Mastering Excel automation
Design and implement financial strategies
Hedging
It is a great story to tell recruiters.
Logistics
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When?
Apr 23th, 5:00pm-9:00pm (possible delays).
Where?
McIntire Financial Labs (reserved).
Who?
Teams of 1-3 (max)
Why?
It substitutes for the final
Winners will get an A+
Options (Grads)
Options
Learning benefits
Grading
Logistics
#1 Participate in the
HT in your current 3
person team
Acquire high competence in Excel,
SQL & Finance by participating in
the Tournament. Unique &
exceptional learning experience.
Up to A+
Recommended
#2 Write a paper on
the use of IT tools in
business
Learn how IT tools are used in a
specific industry by analyzing a
real-world example.
Up to A
Individual task (also requires
completing all homework)
#3 Completing the full
homework series
Focus on other classes after the
acquisition of intermediate skills in
SQL and Excel.
Up to B+
You will be done early. Still need to
attend if you want participation
points. Individual task.
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I assume that you are in option #1 until you tell me differently in writing.
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Option choices are final. Only declared teams can do team submissions.
Teams (4230 & GCOMM7770)
 Three people max
 Lone Wolves
 Team Composition is due as soon as you
want to do team submissions (after the
break)
No Team?
 Name
 Year, School
 Tournament attitude / team formation
Team Declaration
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Email to [email protected] names, userIds and team name
We are team “Meltdown”:
fhe6h, Mark Delltrop
has7b, Mary Lund
kwu92, Xiao Lee
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Check on Collab for your TeamID
Submission MUST be named as in this example: “Team23.zip” or
the TA will not know it is a team submission and you will not get a
grade.
Outline
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Tournament Objectives
Trading
Accounting
Technology
Recommendations
 Bookmasters: Read the hidden slides!
Hedging Tournament
You will hedge an illiquid portfolio of stocks
and options. That means that you will make
investments to reduce the risk of adverse
market movements in your portfolio.
The portfolio and a capital account
is given to you at the beginning
of the tournament.
Securities in the Tournament
 A dozen Stocks
 About 240 European options (n stocks x
2 types x 2 expirations x 5 strike prices)
List of Stocks
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KMB
GOOG
BABA
SHLD
CMG
AMZN
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SNE
DIS
AAPL
VFC
BAC
UA
Your Initial Portfolio (IP)
 Stock and options on the companies
included in the Tournament + Capital
account (cash) ~ $50mil.
 You cannot change your positions on the
tickers/symbols in your IP. That means that
you cannot trade the symbols in IP. However,
you must cash / pay IP dividends, and may
exercise IP options as appropriate.
Hedge Tournament
WINNING THE
TORNAMENT
Objective: Minimize risk while
producing a target rate of return.
Your job is top minimize the difference between your Target
Total Portfolio Value TaTPV and your actual Total Portfolio Value
TPV. The difference is called the Tracking error TE.
TE = TaTPV – TPV
if TaTPV > TPV
(i.e., loss)
TE = |TaTPV – TPV|/4
if TaTPV < TPV
(i.e., gain)
Every Sunday we measure your TE. The Total Tracking Error TTE
is the sum of all TEs.
Tournament Winners
The team who at the end of the trading
period has the lowest Total Tracking Error
wins the Tournament
Section winners
Hedge Tournament
TRADING
Basic Architecture
Fin. Data Feeds
Fin. Info
Positions
Initial positions,
Market prices, Risk free rate…
Your
team
Trades
Updated Positions
Trade Execution
 Trades are executed by
posting a trade record to
the ‘transaction queue’
 Trades are irrevocable
Trades
 Trades are always made against cash
 If you are selling:
Tot Tr. Value = Qty * Bid price – transaction cost
 If you are buying:
Tot Tr. Value = -(Qty * Ask price) – transaction cost
Types of Transaction
Buy
Sell
SellShort
CashDiv
X-Put
X-Call
 Only these six transaction codes are valid.
 Copy exact spelling, including dashes, caps and spaces.
Transaction Costs
Table is in the DB
Type of Trade
Sell Short Stock
Buy Options
EXAMPLE Cost Coefficient
(Find them in the DB)
0.0250
0.0100
Transaction cost = Cost Coefficient * (Qty * price)
No parameter value (e.g., cost coefficients, risk free interest rate) is completely
fixed. Do not hardwire them in your models. They may change from HT to HT.
Hedge Tournament
End of part I
WINIT and Demo
Transactions and Trades
YOU
Transaction
(trade)
Confirmation
Ticket
(next “day”, i.e. next minute)
SYSTEM
Tournament Timeline
Market data & IP posted
(neither is known in advance
The tournament
begins
Second set of market
prices
Tournament ends
First set of
market prices
Third set of market
prices...
No Trade
Start
Trading ~ 3 hrs
No Trade
End
All times are server times
Trades – The fine print
 Securities that are listed with a price of $0
cannot be traded.
 You cannot trade twice the same ticker or
symbol in the same day - i.e., no “money
burning.” Both trades will be rejected.
What To Trade?
Main job of the portfolio manager in each
team:
 Identify a good financial strategy
 Basics will be covered in class – most will be your
own ideas about financial strategy
 DELTA HEDGING + your mods is highly
recommended
Hedge Tournament
ACCOUNTING
Bookkeeping
 Maintain at all times an updated book of
positions (“team portfolio”) on the server.
 Portfolio update is done
immediately after
TeamPortfolio03
each trade.
SYMBOL
UNITS
Exception: “Capital
Account” is in $
MSFT
IBM
GE
200
100
500
CapitalAccount
5,000.00
Mark-to-Market Value
 Mark-to-Market Value = (Bid + Ask) / 2
 Ask > Bid. Difference is the ‘spread’
(0.1-0.2%)
 Bid and Ask change in time. Use the
latest available.
Pricing Models
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Options are priced approximately according to the BS
formulas
Pput = BS (X, S, t, vol , r) + e
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X = strike price
S = underlier price
t = time in years
vol = volatility
r = risk free rate
e = random error (noise) E(e) = 0
Everything except the volatilities is given to you in the data
feeds.
Dividends
In $
Paid quarterly
Not constant
Need to report them (as a transaction) : use
“CashDiv” on the dividend date
 The owner of the stock at the beginning of the
dividend day gets the dividends
 You do not get dividends from short stocks. You
need to pay them on the dividend date!
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Exercising Options
 European options only: you can exercise them only
on the Saturday following the third Friday of the
month of expiration
 It is like buying/selling stock @ strike,
 Has a transaction cost
 Cannot trade options that have a price of $0.
 For short calls & long put need to have the stock in
hand
 There will be no short options that expire in the IPs
Interest
 Cash earns interest continuously
 Just before every transaction compute the
interest on the Capital Account
 Interest = CAccount * ert -1
where
t = time in years between the last transaction and
this transaction.
r= risk-free interest rate.
Margins
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You must maintain cash margins = 30% of the current value
of all short securities in your portfolio
Margins change in time. Margins are reassessed after each
trade
Margins are capped (e.g., MaxMargins =$10mil).
Step by step: Calculate z = S(qtyi * mtm) for the short
securities in your portfolio. The margins are = 0.30 * z, so
make sure that your cash position after the trade is larger
than z * 0.30
Short Positions – The fine print
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You can sell short both stock and options. There are margin requirements
(discussed later)
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You may not sell short if you have a long position on the same security.
Example: you can not sellShort 250 GOOG if you hold a long position in 100
GOOG. First you sell the long position, then you go short. You must do so in two
separate days.
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If you have a short position in an option that is in the money at expiration, you
must honor it. If not in IP, you can buy it back before expiration (easiest).
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Before you exercise a short call or a long put, you need to own the stock.
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If you have a short position in a stock and the dividend date comes, you need to
pay dividends. Treat it as a CashDiv transaction with a negative sign
Hedge Tournament
TECHNOLOGY
The tournament will run in HedgeTournamentALPHA on
f-sg6m-s4.comm.virginia.edu
DataBase Structure
Data Feeds
Markets
Economic
Environment
Conditions
Bookkeping
Transactions
DataBase Structure (spr 13)
Hedge Tournament
RECOMMENDATIONS
Team Roles
You are a small Hedge Fund
 Portfolio Manager
 CIO/CTO
 Bookmaster/COO
 PM
 Trader
 Internal Auditor
Recommendations
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This is not your typical school project. Your trader must work for an
extended period of time.
Outcome is what matters (not program elegance or amount of work).
You are your own customer – I am here to help you, not judge you.
Have a plan B (and C) for everything that can go wrong.
Leadership: Assign clear role & responsibilities and deliverables to team
members. Monitor deliverables.
DO NOT trust your best programmer to get it done right and in time the
night before. She/he will not. You will regret it.
Freeze deliverables. Version control.
Test, test, test, test.
Grounds for Penalties
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Trading on non-current prices (minor)
Failing to accurately update the books after each trade (minor)
Failing to accurately report and account for transaction costs
Monitoring other teams’ activities
Failing to respect the margin cap
Failing to maintain the cash max margin (severe)
Letting the capital account go negative (severe)
Altering the records of another Team (most severe)
Hacking/disrupting the database,
the server, or the network (disqualification)
Suggested To Do List
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Meet. Assign roles. Review the rulebook.
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Project mgmt class?
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Decide on a plan of action wrt the design of the software.
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Choose a team name and get access to the DB (email instructor and TA)
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Study the DB schema. Do you understand what each piece of data is?
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Gather all the formulas.
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Gather volatilities / decide where to get them from.
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Prepare test data: paper/pencil
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Test it (not the developer, somebody else).
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Figure out a trading strategy
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Figure out a starting strategy: what do to when you get those first (3pm) data.
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Understand your warm/cold start tactics
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Test everything.
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Simulate errors. Can you recover from a crash?
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Do a full simulation of the tournament.
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General System Test (participation)
Notes etc.
 The rules are stable. No major changes are
expected. Clarifications may occur as a result
of my interaction with you.
 Check this slide pack frequently for this
symbol
 If something is incorrect, let me know
 Use the discussion forum on Collab
 If in doubt, ask!
Recently
edited slide
And the Winner is….
Your face here.