401 P2 A02 Q2(a)

Gareth · Apr 12, 2008

A highly specialised fund manager invests his clients’ money in UK Treasury bills and writes deep out-of-the-money call and put options on the FTSE 100 index. At the beginning of each month, he writes an equal number of one-month, out-of-the-money call and out-of-the-money put options on the FTSE 100 index. The strike prices of the call options are chosen to be 2.5 standard deviations above the current value of the index and those of the put options 2.5 standard deviations below the current value of the index. He invests the option premiums in UK Treasury bills. Each month he writes sufficient options to generate a return of 1.5 times the expected return on his UK Treasury bill portfolio for that month.
(a) Discuss the additional information that you would need to obtain
before you could make a judgement as to whether you could rely on a
risk adjusted performance measure in assessing the manager’s
performance.
Click to expand...

We would need to examine all the sources of return and the risks being taken by such a manager.
So we would probably need to look at the very minimum at the main
risks: credit risk, market risk, the liquidity of the positions, and the
exposure of the positions to changes in volatility.
Click to expand...

Where's the credit risk here? He's writing options (so no credit risk to him, only the counterparty has to worry) and invests in UK Treasury bills...

Colin McKee · Apr 12, 2008

good point

Anyone else see a credit risk here?

Log in or Sign up

401 P2 A02 Q2(a)

Gareth Member

Colin McKee ActEd Tutor Staff Member

Share This Page

Log in or Sign up

Useful Searches

401 P2 A02 Q2(a)

Gareth Member

Colin McKee ActEd Tutor Staff Member

Share This Page