portfolio simulation project

Class Learning Objectives

· Describe various types of forward and futures contracts

· Price both forward and futures contracts

· Understand various investment styles of hedge funds and their use of derivative instruments

· Explain the meaning of arbitrage and how it applies to pricing of futures contracts and options

· Explain various speculative and hedging strategies

· Outline the specifications of a futures contract and calculate margin levels and position gains or losses

· Calculate forward rates on stocks, indexes, commodities and currencies

· Understand the basic principles of call and put option pricing

· Understand and apply Black-Scholes option pricing model

· Explain the basic and advanced option strategies

BlackRock

Alex B, Hong J, Marc C, Michael F, Netanel Y, Ryan D,

Portfolio Simulation Project

Team Roles - need to add a sentence to each

Alex B: Risk Officer

Hong J: Fund Manager

Marc C: Market Strategist

Michael F: Options Strategist

Netanel Y: Equities Strategist

Ryan D: Lumber Specialist

Hedging

Futures (Ryan)

Equities (Alex)

The first purchases we made for our stock portfolio were equities. When looking at equities, rather than investing into individual stocks, we chose to invest into several ETFs. This decision was greatly due to the fact that from our equities in our portfolio, we were looking to get consistent returns with minimal volatility and risk associated. The first ETF we chose to invest in was the JETS ETF, an industrial equities ETF composed of strictly companies involved in air transportation. This industry as a whole suffered greatly during the COVID-19 pandemic, as the vast majority of major airline companies saw sharp decreases in revenues due to flights being grounded and other travel restrictions. The JETS stock saw a significant decrease in share value at the start of the pandemic, its price falling from $31.33 on 02/10/2020 (one-month prior to pandemic restrictions) to $12.49 on 03/16/2020 (just after travel restrictions imposed). This ETF hit an all-time low on 05/11/2020, a 61.7% decrease of its value just two months prior. Over time as certain travel restrictions were lifted and vaccines became more readily available, the airline industry began to bounce back. In April, as our stock portfolio simulation started, vaccines were becoming increasingly available to the public, and international travel restrictions were lifted, making our group optimistic regarding the future performance of the JETS ETF. We purchased just over $30k of this stock at $27.87 a share, a 3% investment of our overall portfolio value. We were optimistic about the performance of JETS due to its slow but steady increase in value over the past few months, but ultimately the airline industry did not recover in the timeframe we anticipated and we suffered a loss of 3.66%. The next equity we invested in was Vanguard’s VOO stock, an ETF which aims to closely track the S&P 500 index’s returns. With an expense ratio of just 0.03%, we felt that this index was a cheap route for us to spread our assets across the many sectors found in the S&P 500 and take advantage of the around-the-clockwork by the analysts at Vanguard. We invested 1% of our initial portfolio value into this ETF and ultimately realized a 3.28% return. Although this return was relatively insignificant to our overall portfolio performance, we were confident in the long-term growth and profitability potential, allowing us to invest our time into closely monitoring more risky investments such as options and futures contracts. The remaining 2% of our portfolio holdings invested in equities were equally split between Vanguard’s S&P 500 value and growth ETFs (VOOV and VOOG). VOOV is an ETF which invests in stocks in the S&P 500 value index, or in other words, companies whose stock price seems to be low in relative comparison to their financial performance. The assumption with value stocks is that over time, their share values will rise to reflect the true potential and financial health of the company, anticipating their growth to outperform their competitors and the industry as a whole when looking at a long-term time horizon. VOOG is an ETF which invests in stocks in the S&P 500 growth index, or in other words, stocks who are expected to outperform market returns on a short-term time horizon. Although these growth stocks do not typically pay dividends in an effort to internally reinvest capital and further accelerate growth, investors anticipate making money through capital gains when they sell their shares in the future. We evenly split our investment between these two ETFs due to their low risk and consistent performance, on both a short and long term timeframe. Ultimately, we saw an increase in value of 4.43% with VOOV and 2.26% with VOOG. Overall, we were satisfied with the returns from our equities investments, and felt that it was a valuable contribution to our overall portfolio by mitigating risk through portfolio diversification.

Options (Michael)

Diversification - marc

BlackRock’s strategy was to keep a well-diversified portfolio across multiple sectors, by investing into both local trends (lumber) and traditional trends (S&P). We watched massive success but suffered even worse losses. We had a competitive nature with little to no communication, and a failure to adapt in the present market. Ultimately leading to the demise of our fund in just 6 weeks. While analyzing our first 3 weeks we showcase a market entry and pivot strategy, and in the last 3 weeks, our rise in success and quick defeat. In the regular market this may happen on rare occasions. Unfortunately, we neither took the opportunity to adapt in the market or account for major sales and purchases.

We had a group consensus on finding sectors individually then report back to discuss strategies. Of the 58 trades made, 23 were options, covers, and shorts, 7 were equities, 5 were in cryptos, and 13 in futures. Of the first option trades placed at the open of week 1, was a SNAP buy at $.22 costing $22,000 and a SNAP short at $.72 cents. Here we made a cover strategy to protect the firm from risks in market volatility, which became an immediate success and a model going forward. The gain from the SNAP short was 4.41%. Of the first trades in equities we invested into vanguard ETF’s VOO, VOOG, & VOOV. This served 2 functions, one as a bet on the rising S&P index, and the second, a comparative measure for our portfolio. When we looked at the crypto sector as a team, we prioritized lower cost alternative coins such as XRP, feeling that the market will drop in price for Bitcoin. XRP is a blockchain ledger that offers a mode of secure currency transfers, comparative to SWIFT and is currently in litigation with the SEC. We are confident in XRP performance because of the adoption and use through central banks in countries across EUR-ASIA and South East Asia. We purchased $20,000 worth of XRP at $1.03 and in user error, sold at $1.08 and repurchased, with a minuscule gain. These were the only crypto trades we made, we would have liked to increase our holdings in other coins such as ETH and LTC.

As we strategize in each type of trade, we try to rely heavily on articles, communication, and an awareness of the market. The first future contracts decided were global corn futures, 25 contracts at $576.25. By the end of Week 1 we had made 17 trades, 9 in options, 4 in equities, 3 cryptos, and a single future contract. We saw this as an excellent start of keeping a well-diversified portfolio expandable. At the open of week 2 our portfolio was down -1.79%. During week 2 we made a total of 10 trades, 9 option short sells, and covers between SNDL, GME, PLBY, and SPCE. Of these four trades we invested into the cannabis agriculture, gaming retail, adult entertainment, and commercial spaceflight. The last trade made in week 2 was a buy into XRP for $80,000 at $1.76. In retrospect we should have sold our holdings in XRP and reduce the risk of time depreciation instead of purchasing more. At the closing of week 2 we managed to reduce our portfolio return to -.17% with a total of 27 trades made. When the markets opened on week 3 our portfolio had dropped to -12.48%, and even further -20.98% the following day. We had a group meeting to discuss strategies to correct our portfolio standing. The result from our conversation was to invest into lumber futures, we reaffirmed our position because of personal, and industry knowledge and purchased 30 contracts at an average of $1,284.90. We had high confidence in the trade because of rising prices in physical lumber from the past 2 months in this inflationary market. This was a massive opportunity that we had not realized, by the end of the 3rd week our portfolio closed at 9.57%. Content with our turn around, we purchased PTON options, and extended our future contracts into wheat and soybean futures. We felt the agriculture industry would see a rise in prices across the board as with corn, and diversified further with these contracts. We ended week 4 with a return of 64%. In the beginning of week 5 we sold our contracts in lumber, corn and wheat, with a profit of $712,192.5. Here was our exit strategy ensuring us the 5% stake on return. By the end of week 5 our portfolio was up 351%, we purchased 20 copper futures to continue diversifying while 360 lumber futures were bought. The open of week 6, our returns had dropped to 80.55%, and this was our last opportunity of liquidating to preserve our returns. The next day our portfolio dropped -198.7% while the entire market dipped for many reasons. A transaction of 100 contracts in lumber futures was also sold and our portfolio has gone belly up hitting peaks of -600%

While communication should have been prioritized in purchasing decisions for every major trade, BlackRock was structured horizontally so that many trades were placed without discussion in trust of risk management strategies. Had we made the correct decision to communicate exit strategies and prioritize our earnings, we would have felt confident in continuing our strategy.

The Good - analytics - hong

The Bad - analytics (Yonker)

Lessons & Takeaways

Exhibits