FIN957 Portfolio Simulation

This project has three parts. The first part concerns building and analysing a portfolio using the objectives listed below. The second involves designing an algorithmic trading program.

Groups should be formed with 4-5 students per group.

PART A:

Create a portfolio using stocks, options, bonds and futures. Carefully maintain a detailed log or diary of your trading activity. This is crucial for evaluating and controlling your performance.

Until Week 4, trade as you like. Your objective is simply to acquaint yourself with the Interactive Broker Trader Work Station (TWS). Starting Week 5, your trading objectives will be as outlined below.

For each trading objective
1) Display TWS trading activity using Trading Log (or) Trading Journal.

Objectives

a)   Youneedtoexecute50,000sharesusingtheVolumeWeightedAveragePrice (VWAP) Algorithm. You may trade any share. Upon completion of the algorithm, you need to:

1) Explain why you have selected the share and whether the share was bought or sold. You may use the Fundamental Explorer；

2）Calculate VWAP and evaluate the quality of the execution.10 marks

b)   You need to execute 100,000 shares within three hours. You may trade any share. Your aim is to achieve the best possible execution; that is, to realize the lowest possible total execution cost B. You are using a market impact model that estimates the cost of each of n equal-sized executions, B/n to have a fixed component F and a variable cost component v(Xi/n)^2, where Xi/n is the number of shares traded in any given execution i:

Broker analysts have estimated F to be $15, based on the order processing costs of each transaction. Market impact costs are estimated with the square root function with v equal to 0.0001.

1) Calculate the optimal number of equal size transactions and the optimal transaction sizes?

2) What is the total market impact or slippage costs associated with the 100,000-share order? 10 marks

Accumulate/Distribute algorithm, allows clients to discreetly enter large volume orders and execute trades over time with minimal market impact and lesser risk of detection by market participants. Apply algorithm using the information provided above and discuss.

c) Create your own Option strategy that are based on a price or volatility forecast. You may use Option Strategy Lab. 8 marks

d)   Analyse your Option strategy.You may use Probability Lab. 8marks

e)   Illustrate that you have reduced the risk of price movements in the underlying security by offsetting positions taken using options. (hint: Delta) 8 marks

f)   Execute “Pairs Trading” Strategy 8 marks

g)   You need to trade any Bond of your choice and illustrate the concept of Fixed Income Arbitrage. You may use Bond Scanner. 8 marks

You can maintain long and short positions in different stocks.

Profit and Loss discussion

• Hypothetically modify your portfolio to test different risk scenarios and discuss you Portfolio Profit and Loss 5 marks

Part A: Total Marks 65

PART B:

Assume that your trading firm has assigned to you a programmer who will design an algorithmic (algo) trading platform for stocks based on your specifications. Your task is to provide the programmer with written information required to design this algorithmic (algo) trading program. The report that you provide should contain the following information, along with anything else that the programmer will require:

a. The objectives and basic strategies of the algo program

5 marks

b. What data the program will require and how the data will be input to the program. You may assume that the firm currently has a trading platform with access to real-time data regarding market quotes and executions. However, you would need to provide details concerning additional data feeds, if appropriate (e.g., news data, events data, insider trading statistics, etc.).

5 marks

c. A discussion as to how data input to the algo program will be converted into a order. What are the rules of your algo program.

10 marks

d. A discussion concerning the design of appropriate trade filters to ensure the safety of the program (e.g., to prevent unwanted trades).

5 marks

Your algo may be based on an alpha strategy to produce trading profits or designed to minimize trade execution costs. You are not required to prepare a prototype program. Essentially, you should consider yourself the "brains" behind the design of the algo program. You need to provide the programmer all the information that is required to implement your design.

Part B: Total Marks 25

PART C:

Presentation. (Each group will present their presentation during their allocated tutorial) The presentation should be approximately 10 minutes.

Groups will present:

Part C: Total Marks 10