Presentation Transcript

1. Welcometo the 12th McIntire Hedge Tournament

   Rules of the TournamentOfficial source – Do not print!(c) 2002-2011 Stefano Grazioli & Bill Wilhelm
2. Outline Tournament Objective Trading Bookkeeping Technology Recommendations
3. When?Apr 27th, 5:30am-8:30pm (possible delays). Where?McIntire Financial Center & Lab (reserved). Who?Teams of 1-3 (max), open to all UVA students. Why? It substitutes the final It is an opportunity to learn hands-on about the intersection of Finance and IT. Winners will get an A+ It is a great story to tell recruiters. The Basics
4. Teams (MS Commerce) I assume that you are in option #4 until you tell me differently in writing. Option choices are final. Only declared teams can do team submissions.
5. Teams (4230 and 7770) One, two, or three people Ghosts Lone Wolves No past winners (or their code) Team Composition is due by next class
6. You do the talking Name Year, School What do you hope to get from the class Things you like about the class Things that can be improved Tournament attitude / team formation
7. Team Roles You are a small Hedge Fund Portfolio Manager CIO/CTO Rulemaster/COO PM Trader Internal Auditor
8. Hedging Tournament You will hedge a portfolio of stocks and options. That means that you will make investments to reduce the risk of adverse market movements in your portfolio. Typically, hedging is done by taking offsetting positionsin related securities.
9. Basic Architecture Initial positions, Market prices, Risk free rate… Fin. Data Feeds Fin. InfoPositions Your team Trades Updated Positions
10. Securities in the Tournament about 12 Stocks about 240 European options (12 stocks x 2 types x 2 expirations x 5 strike prices)
11. List of Stocks Aapl Goog Dis C T IBM P&G MSFT XOM KO AMZN YUM
12. Your Initial Portfolio (IP) Stock and options on the companies included in the Tournament + Capital account (cash) About $50~75 mil You cannot change the net quantities on the tickers/symbols in your IP. You must cash / pay dividends on those stocks, and may exercise options if any of them expire during the tournament.

13. OBJECTIVE

14. Objective Minimize liquidity risk while producing a target rateof return. This means keeping your Total Tracking Error as small as possible, ideally zero. Total Tracking Error TTE = sum of all TEs, measured every Sunday. Tracking Error TE = |TaTPV – TPV| if TaTPV > TPV(i.e., loss) |TaTPV – TPV|/4 if TaTPV < TPV (i.e., gain) Target Total Portfolio Value TaTPVt = TPVatStart * ert Total Portfolio Value TPVt = Capital Accountt + Portfolio Value(including IP) t
15. TPV Portfolio Value = Sum of (Sec. Value * Sec. Quantity) Two methods to assess value of a security Mark to market method(if you have bid and ask prices) Pricing models (if you do not)
16. Tournament Winners The team who at the end of the trading period has the Lowest Total Tracking Error wins the Tournament. Official winners nominated during the next class. Trade records will be audited. Rankingsmay change as a result of the discoveryof errors and irregularities. Tournament grade depends onplacement, number and size of errors,and system quality. Many can do well.
17. Tournament Timeline Market data & IP posted (neither is known in advance Second set of market prices The tournament begins Tournament ends First set of market prices Third set of market prices... Trading ~ 3 hrs No Trade No Trade Start End All times are server times

18. TRADING

19. Transactions and Trades YOU ConfirmationTicket(next day, i.e. next minute) Transaction(trade) SYSTEM
20. Types of Transaction Buy Sell SellShort CashDiv X-Put X-Call Only these six transaction codes are valid. Copy exact spelling, including caps and spaces.
21. Trades Trades are always made against cash If you are selling:Qty * Bid price – transaction cost = + cash If you are buying:Qty * Ask price + transaction cost = - cash
22. Transaction Costs Depending on the type of trade, there is a transaction cost (a commission) to pay on each trade. The TC table 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.
23. 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.
24. Trade Execution Trades are executed by posting a trade record to the server. Trades are irrevocable Simplified Traderecord schema An example TeamIDTypeTicker QtyPrice TransactionCostTotCostOfTrade 14BuyMSFT 200 $40 $10 $8,010
25. Data Dictionary for Transactions Date = the current date found in the environment variables TeamId = official team number found in the Bboard Type = one of the six transaction types (see the slide in this deck for a list). Must be spelled exactly. Symbol = the symbol of the transacted security. For X-put and X-call it is the option. Qty Price = the appropriate bid/ask. For CashDiv Dividend is the actual $ value per share. Cost = the cost of the transaction. Price * qty * t.c. coefficient Tot value = qty * price +/- Cost InterestSinceLastTransaction. Interest on the cash held since last transaction (or beginning of the tournament if none exists). Computed as CAccount * ert -1Time is measured in years. CashPositionAfterTransaction. Tot Margins. 30% of every short position that you own, assessed at mtm. TimeStamp, RowId, Processed. Used by the system. Do not attempt to fill/change.
26. 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 a stock and the dividend date comes, you need to pay dividends. Treat it as a CashDiv transaction with a negative sign If you have a short position in an option that is in the money at expiration, you need to honor it. If not in IP, you can buy it back before expiration (easiest) Before you exercise a short call (long put), you need to own the stock.
27. Margins Must maintain cash margins = 30% of the current (mtm) value of all short securities in your portfolio. Margins change in time, because the mtm of the short positions that you hold changes in time. Margins are reassessed after each trade. Margins (and thus the amount you can go short) are capped to a max $ value (e.g., $10mil) Step by step:Calculate z = S(qtyi * mtmi) for the short securities in your portfolio.The margins are = 0.30 * z, so make sure that the cash position after the trade is larger than z * 0.30;
28. What To Trade? That is the main job of the portfolio manager in each team: Identify a good financial strategy DELTA/GAMMA HEDGING + your mods is highly recommended Basics will be covered in class – most will be your own ideas about financial strategy

29. BOOKKEEPING

30. Bookeeping You must maintain at all times an updated book of positions (“team portfolio”) on the server. Portfolio update is done immediately after each trade. TeamPortfolio03 Exception: “Capital Account” is in $
31. Mark-to-Market Value Security Mark-to-Market Value = (Bid + Ask) / 2 Bid = selling price Ask = buying price Ask > Bid. Difference is the ‘spread’ (0.1-0.2%) Bid and Ask depend on market forces anddo change in time. Use the latest available Bid and Ask.
32. 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(e) = 0 Everything except the volatilities is given to you in the data feeds.
33. 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!
34. Exercising Options Exercise them on the Saturday following the third Friday of the month of expiration European options only: you can exercise them only on that Saturday It is like buying/selling stock @ strike, and has a transaction cost Can buy/sell options up to expiration day. Cannot trade options that have a price of $0. There will be no short options that expire in the IPs
35. 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.

36. TECHNOLOGY

    HedgeTournamentALPHA is on f-sg6m-s4.comm.virginia.edu
37. DataBase Structure Data FeedsMarkets EconomicEnvironmentConditions Bookkeping Transactions
38. DataBase Structure (spr 10)

39. RECOMMENDATIONS

40. Recommendations This is not your typical school project. This has to work for an extended period of time. Outcomes is what matters (not program elegance or amount of work). You are your own customer – your instructor is here to help you, not judge you. Have a plan B (and C) for everything that can go wrong.Redundancy. Management. 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.
41. 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 (most severe) Altering the records of another Team (most severe) Hacking/disrupting the database,the server, or the network (disqualification)
42. Meet. Assign roles. Project mgmt class? Decide on a plan of action wrt the design of the software. Get access to DB (soon, in class) Study DB schema. Do you understand what each piece of data is? Gather all the formulas. Gather volatilities / decide where to get them from. Build the one-star system ASAP (we will cover relevant topics soon) Prepare test data: paper/pencil Test it (not the developer, somebody else). Build the two-star system. Get data to test it. Test it Figure out a trading strategy: what do to when you get those first (3pm) data. Build the x-star system. Get data to test it. Test it. Do a full simulation of the tournament. General System Test (participation) Suggested To Do List
43. 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 If in doubt, ask! Use the discussion forum! Recentlyedited slide
44. Constants Trading days / year = 252 Year = 365.25
45. A McIntire Tradition You are the pioneers of what is becominga McIntire tradition Help meto make it work!
46. And the Winner is…. Your face here.