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Welcometo the 16th

McIntire Hedge

TournamentRules of the Tournament

Official source – Do not print!(c) 2002-2015 Stefano Grazioli & Bill Wilhelm

Learning GoalsHelp you learn broad & valuable skills that will help you in your career

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 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)

I assume that you are in option #1 until you tell me differently in writing. Option choices are final. Only declared teams can do team submissions.

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.

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 Email to Grazioli@virginia.edu names, userIds and team name

We are team “Meltdown”: fhe6h, Mark Delltrop has7b, Mary Lund kwu92, Xiao Lee

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 Tournament Objectives Trading Accounting Technology Recommendations

Bookmasters: Read the hidden slides!

Hedging TournamentYou 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 accountis given to you at the beginningof 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 KMB GOOG BABA SHLD CMG AMZN

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.

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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 WinnersThe team who at the end of the trading period has the lowest Total Tracking Error wins the Tournament Section winners

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Basic Architecture

Fin. Data FeedsFin. InfoPositions

Initial positions,Market prices, Risk free rate…

Trades

Updated Positions

Yourteam

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 CostsTable is in the DB

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.

Type of TradeEXAMPLE Cost

Coefficient(Find them in the DB)

Sell Short Stock 0.0250Buy Options 0.0100

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WINIT and Demo

Transactions and Trades

Transaction(trade)

ConfirmationTicket

(next “day”, i.e. next minute)

SYSTEM

YOU

Tournament Timeline

The tournament begins

Tournament ends

Second set of market prices

Third set of market prices...

Start End

Market data & IP posted (neither is known in advance

First set of market prices

All times are server times

Trading ~ 3 hrs No TradeNo Trade

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

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Bookkeeping Maintain at all times an updated book

of positions (“team portfolio”) on the server.

Portfolio update is doneimmediately aftereach trade.

SYMBOL UNITS

MSFT 200

IBM 100

GE 500

CapitalAccount 5,000.00

TeamPortfolio03

Exception: “Capital Account” is in $

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 Options are priced approximately according to the

BS formulas Pput = BS (X, S, t, vol , r) + e

X = strike price S = underlier price t = time in years vol = volatility r = risk free rate e = random error (noise) E( ) = 0e

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!

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

wheret = time in years between the last transaction and

this transaction.r= risk-free interest rate.

Margins 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 You can sell short both stock and options. There are margin

requirements (discussed later)

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.

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).

Before you exercise a short call or a long put, you need to own the stock.

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

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The tournament will run in HedgeTournamentALPHA on f-sg6m-s4.comm.virginia.edu

DataBase Structure

Data FeedsMarkets

EconomicEnvironmentConditions

Transactions

Bookkeping

DataBase Structure (spr 13)

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Team RolesYou are a small Hedge Fund Portfolio Manager CIO/CTO Bookmaster/COO PM Trader Internal Auditor

Recommendations 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 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 Meet. Assign roles. Review the rulebook.

Project mgmt class?

Decide on a plan of action wrt the design of the software.

Choose a team name and get access to the DB (email instructor and TA)

Study the DB schema. Do you understand what each piece of data is?

Gather all the formulas.

Gather volatilities / decide where to get them from.

Prepare test data: paper/pencil

Test it (not the developer, somebody else).

Figure out a trading strategy

Figure out a starting strategy: what do to when you get those first (3pm) data.

Understand your warm/cold start tactics

Test everything.

Simulate errors. Can you recover from a crash?

Do a full simulation of the tournament.

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!

Recentlyedited slide

And the Winner is….Your face here.