NUR113 Nursing Concepts
Question:
a. Inverse VIX strategy: the idea of this strategy is to replicate the inverse behavior of the VIX index using futures. This is achieved by building an equally-weighted porNolio with short posi%ons on the nearest to expira%on VIX futures.
b. VIX strategy: the idea of this strategy is to replicate the behavior of the VIX index. This is achieved by building an equally-weighted porNolio with long posi%ons on the nearest to expira%on VIX futures.
Assume that you start a strategy on January 2, 2018 and you close it on May 24, 2018. Assume also that the porNolio is ini%ally composed of 40 contracts (20/20). Assume that each strategy is rolled one day before the expira%on of the front contract. For instance, on April 17th 2018 your company has an equally-weighted porNolio composed of the April (the front contract) and May contracts. The company closes the posi%on on the April and the May contract, and the value available from these contracts is used to build an equally- weighted porNolio on the May (the new front contract) and June contract.1 If there is a remaining dollar amount from the opera%on, the company invests this money in an over-night paying account that offers an effec%ve annual rate of 2%. This investment is available for the next rebalancing %me. Assume that transac%on costs (buy or sell) are $2 per contract, that the ini%al margin requirements are $7,700 for the front contract and $4,600 for the next maturity contract, and that the maintenance margins are $6,000 and $3,000 respec%vely. Also, assume that margin- calls are deposited by the end of the day. For simplicity, assume that there are no interests on margin balances.
If there are not enough funds to roll the strategy, the remaining funds are invested in the over- night account and the strategy is closed.
A) What is the mul%plier of the VIX contract trading at the CBOE?
B) What is the ini%al value invested in each strategy?
C) How many rolls are carried out? Provide the dates, number of futures contracts before and aaer the roll, and transac%on costs for each strategy.
D) Do any of these strategies generate margin calls? If yes, provide details (amount, number of margin calls).
E) What is the profit (loss) for each strategy?
Answer:
- (a)What is the multiplier of the VIX contract trading at the CBOE?
The contract multiplier for each of the VIX Futures contract is Dollar 1000 trading at the Chicago Board Option Exchange.
(b) What is the initial value invested in each strategy?
Inverse Vix Strategy: The initial amount invested under this strategy is detailed here-in-below
On January 02-01-2018: For long Future contract on February and short on January= 20*7700 + 20*4600= 2,46,000
Further cost of 80 dollar shall be expended toward entering into contract.
Initial contract value short =.10.875*1000*20= 2,17,500.
Initial contract value long = 11.975*1000*20= 2,39,500
Vix Strategy: The initial amount invested under this strategy is detailed here-in-below:
On January 02-01-2018: For long Future contract on January and short future contract on February= 20*7700 + 20*4600= 2,46,000
Further cost of 80 dollar shall be expended toward entering into contract.
Initial contract value long =.10.875*1000*20= 2,17,500.
Initial contract value short = 11.975*1000*20= 2,39,500
-
C) How many rolls are carried out? Provide the dates, number of futures contracts before and after the roll, and transaction costs for each strategy.
-
D) Do any of these strategies generate margin calls? If yes, provide details (amount, number of margin calls).
-
E) What is the profit (loss) for each strategy?
Refer Excel for detailed working
Brief Snapshot
Inverse Vix
|
Particulars |
Amount |
|
Total Amount Invested over the horizon (Note 1) |
1224300 |
|
Closing Balance |
1230000 |
|
Amount in Index |
746.25 |
|
Profit (Answer E) |
6446.25 |
|
No of Margin Calls (Answer D) |
7 |
|
Total Margin Called |
984000 |
|
No of Roll overs (Answer C) (Refer Excel) |
6 |
Note 1: As written in the question, that whenever the amount fell below maintenance margin, fresh money has been pumped in. The same has been duly considered for analysis. Further, the analysis assumes that no money has been withdrawn over the horizon of passive investment. Further, as fresh is pumped in there cannot be any instance where the rollover shall not take place
VIX
|
Particulars |
Amount |
|
Total Amount Invested (Refer Note 1 Above) |
986650 |
|
Closing Balance |
1033200 |
|
Amount in Index |
2915.91 |
|
Profit (Answer E) |
49465.91 |
|
No of Margin Calls (Answer D) |
4 |
|
Total Margin Called |
740650 |
|
No of Roll overs (Answer C)(Refer Excel) |
6 |
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