Finance Assignment: Analysis of AIM, Bond and Futures Markets

This assignment delves into various aspects of financial analysis, starting with the Alternative Investment Market (AIM) and its characteristics. It then progresses to bond valuation, including calculations of dirty price, current yield, and yield to maturity, along with duration and price value of a basis point (PVBP) analysis. Furthermore, the assignment explores futures trading, specifically focusing on Bitcoin futures, including butterfly spreads, volume trends, and the calculation of basis. Finally, it covers portfolio construction and analysis, using the Elton & Gruber and Treynor-Black models to assess portfolio performance, calculate risk measures (beta, alpha, specific risk), and evaluate the effectiveness of different investment strategies. The solution includes detailed calculations, formulas, and interpretations of financial concepts, providing a comprehensive understanding of the topics covered.

1. It is a requirement that you keep a photocopy of your problem set and a copy
of the spreadsheets used
2. Provide your answers in this Answer Booklet provided. This is in Word format to
enable you to edit the document to change box sizes etc. but you must maintain
the general format of the presentation. Excessively long answers will be penalised.
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Q1
(a) Briefly describe AIM.
AIM referred to as Alternative Investment Market is a sub-market of the London
Stock Exchange (LSE). It was started to assist smaller companies to raise capital
by listing them on the public exchange. However, as these companies are small the
listing is not at the level required to list on a large exchange or undergo an IPO.
Furthermore, its regulation is much more relaxed than the larger exchanges.
AIM Index:
1. FTSE AIM 100 Index 2. FTSE AIM All-Share Index
(b) MyMarket Portfolio:
Share Number of
Shares (m)
Price (p) Proportion
of the
Market
BOO 1160 53.0000 46.83%
GHH 24.96 662.3101 12.59%
REDD 306.67 50.81488 11.87%
SCPA 154.64 112.5982 13.26%
STAF 27.94 725.9619 15.45%
Total - - 100.00%
(c) (i) P1 = P0 e
r
12
Formula for r:
P1 = P0 e
r
12
P1/ P0= e
r
12
r/12= ln(P1/P0)
=> r = ln(P1/P0)*12
(d)
Correlation Coefficients
RBOO RGHH RREDD RSPCA RSTAF RMKT
RBOO 1.00
RGHH 0.35 1.00
RREDD 0.09 0.23 1.00
RSPCA 0.14 0.37 0.05 1.00
RSTAF -0.11 -0.06 0.13 0.09 1.00
RMKT 0.81 0.56 0.39 0.46 0.20 1.00
(e)
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RBOO RGHH RREDD RSPCA RSTAF RMKT
¯R 24.23% 11.21% 22.04% 20.13% -1.60% 19.54%
Sigma, σ
149.26% 89.86% 111.13% 102.29% 158.94% 81.13%
Beta, β
1.4942 0.6171 0.5395 0.5835 0.3884 1.0000
Αlpha, α
-4.71% -1.04% 11.27% 8.52% -9.50% 0.00%
Nu, η
28.04% 39.79% 67.36% 54.95% 127.43% 0.00%
ERB
0.1588 0.1735 0.3993 0.3363 (0.0542) 0.1904
(f) (i) Elton & Gruber Table
Rank Share ¯R Beta, β η2 ERB Cj
1 REDD 22.04% 0.5395 0.4538 0.3993 0.1185
2 SPCA 20.13% 0.5835 0.3020 0.3363 0.1932
3 GHH 11.21% 0.6171 0.1583 0.1735 0.1849
4 BOO 24.23% 1.4942 0.0786 0.1588 0.1632
5 STAF
-1.60% 0.3884 1.6238 (0.0542) 0.1626
C* = 0.1932
(ii) Final E&G Portfolio
Share Proportion in EG
portfolio
Proportion in mkt
portfolio
Side bets
REDD 46.98% 11.87% 35.11%
SPCA 53.02% 13.26% 39.76%
GHH 0.00% 12.59% -12.59%
BOO 0.00% 46.83% -46.83%
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STAF 0.00% 15.45% -15.45%
Total 100.00% 100.00% 0.00%
(g) (i) Treynor-Black Active Portfolio
Share R β η2 α α/η2 Proporti
ons
REDD 22.04% 0.5395 0.4538 11.27% 0.2485 46.83%
SPCA 20.13% 0.5835 0.3020 8.52% 0.2821 53.17%
(ii)
Active Portfolio
Beta, β Alpha, α Specific risk, η2
0.5629 9.81% 0.1849
(iii)
Proportions in TB Portfolio
Active Market
101.81% -1.81%
(iv) TB Final Portfolio
Share Proportion in TB
p/folio
Proportion
In Mkt p/folio
Side bets
REDD 47.46% 11.87% 35.59%
SPCA 53.89% 13.26% 40.63%
GHH -0.23% 12.59% -12.81%
BOO -0.85% 46.83% -47.68%
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STAF -0.28% 15.45% -15.73%
Total 100.00% 100.00% 0.00%
(h) TB Performance Measures
TB Market
Sharpe’s Measure 0.3272 0.2346
Treynor’s Measure 0.3646 0.1904
Modiglianis’, M2 27.05% 19.54%
Comments on Performance of TB Portfolio
The Sharpe ratio assesses excess return compared to its risk. Treynor ratio assesses
the excess return generated for each unit of risk in a portfolio.
The TB Portfolio Sharpe ratio is higher than the market; therefore its performance
has improved on a risk adjusted basis.
Furthermore, the TB Portfolio Treynor ratio is higher than the market. Therefore,
the portfolio is outperforming the market's average gains.
Which is better?
Sharpe measure is a better ratio because the Treynor measure is a backward-
looking ratio that relies on using a specific benchmark to measure beta. Most
investments don't perform the same way in the future as they did in the past. The
sharpe ratio takes this into account as it utilizes the total risk.
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Q2
(a) (i) Specification only Not the whole page
Bond Information
Issue Date 05 Jun 2014
Maturity Date 16 Sep 2022
Coupon Value +5.125%
Coupon Type Fixed
Coupon Frequency 6 months
Coupon Payment Date 18 Sep 2018
Redemption Date 16 Sep 2022
Redemption Type single redemption date
Index Inflation Date
Minimum Denomination 100.00
Denomination Currency GBP
Code Convention
Calculate ACT/ACT
Unit Of Quotation 100
Type Corporate Bond
Trading Service Order book for retail bonds
Market -
Trading Hours Auction 7:50am - 8:00am, Continuous Trading 8:00am to
4:30pm
Settlement cycle
Last close
106.25 on 15-Apr-2019 T+2
(ii) Quote the Date and Bond price at time of download.
Date: 16 April 2019
Bond Price: GBP 106.25
(iii) Calculate the dirty price on your date of download given in (ii)
Dirty price is the clean price plus the amount of interest accrued since the last
coupon payment
Trade Date: 16 April 2019
Settlement Date: 17 April 2019
Last Coupon Date: 16 March 2019
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Actual days- 17-31 March: 15 days and April 1-16:16 days ,therefore 31 days
since last coupon payment
Using day count convention= actual/365
Clean price=106.25
Accrued interest=31/365*5.125%*100=GBP 0.44
Dirty price = 106.25+0.44
= GBP 106.69
(iv) Find the current yield on the date of (ii).
Current yield= annual coupons/current bond price
=5.125/106.25
=4.82%
(v) Most recent (2019) coupon date. 16 March 2019
Clean Price = GBP 105.13
(vi) Equation for yield to maturity, rm.
105.125= 2.5625
(1+rm/2)+ 2.5625
(1+rm/2)2 + 2.5625
(1+rm/2)3 + 2.5625
(1+rm/2)4 + 2.5625
(1+ rm/2)5 + 2.5625
¿ ¿
(vii) Yield to maturity, rm = 3.55%
(viii)
Time (y)
Cash
Flows (£) PV
Weights,
PV/Price
Time*weights
0.5 (Sept,19)
2.56 2.52 0.02 0.01
1 (Mar, 2020)
2.56 2.47 0.02 0.02
1.5
2.56 2.43 0.02 0.03
2
2.56 2.39 0.02 0.05
2.5
2.56 2.35 0.02 0.06
3
2.56 2.31 0.02 0.07
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3.5 (Sept,22
102.56 90.66 0.86 3.02
rm =
3.55%
Price (£) =
105.13
Duration (y) =
3.26
(ix) Estimated Price with formulae used.
A rise of 25 basis suggests that rates have increased by 0.25%
PVBP = modified duration *105.13*0.25%
Modified Duration = 3.26/(1+3.55%/2)=3.20
PVBP=3.20*105.13*0.25%
=0.84
Price=GBP 105.97
Q3
(i) Table of BCT Futures Prices and Volumes
Date of Download 17 April 2019
Active Month of Contract April May June July
Designation of contract BTCJ19 BTCK19 BTCM19 BTCN19
Last Price 5205 5210 5210 -
Volume 3607 67 6 0
(ii) Price of butterfly including formula:
A butterfly spread is created by selling the BTCJ9 @$5205 , selling BTCM9
@$5225 future and buying two BTCK9 @$5210 each
This costs 2*5210-5205-5210= $5 initially
(iii) Butterfly speculative position.
Buy butterfly - The butterfly spread leads to a loss when the price is greater
than $5210 or less than $5205.
Sell butterfly - The butterfly spread leads to a loss when the price is at $5210.
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If price of middle contract move towards mean (i.e $5207.50), the investor
should buy the butterfly i.e. buying the BTCJ9 @$5205 , buying BTCM9
@$5225 future and selling two BTCK9 @$5210 each
(iv) Trend in Volumes.
The Volumes of trades are higher for contracts that are more active
(v) Next active futures contract.
The next active contract is the May 2019
BTCK19
(vi) BRR and BRTI values.
BRR-$5042.76
BRTI-$5209.30
(vii) How BRR is updated.
BRR is a standardized daily reference rate of the U.S. Dollar price of one
bitcoin as of 4:00 p.m. London time. It is representative of the bitcoin trading
activity on constituent exchanges.
The daily calculation steps are as follows:
1. All Relevant Transactions are added to a joint list, recording the trade
price and size for each transaction.
2. The list is partitioned into 12 equally-sized time intervals
3. For each partition separately, the volume-weighted median trade price
is calculated from the trade prices and sizes of all Relevant
Transactions, i.e. across all Constituent Exchanges.
4. BRR is then determined by the equally-weighted average of the
volume-weighted medians of all partitions
How BRR is used.
Bitcoin futures are based on the BRR, which aggregates bitcoin trading
activity across major bitcoin spot exchanges into a once-a-day reference rate
of the U.S. dollar price of bitcoin.
Its rules are geared toward maximum transparency and real-time replicability
in underlying spot markets.
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(viii) Calculation of basis:
Cash Price – Futures Price = Basis at a specific point in time
Basis =5209.30-5205= +$4.30
Contango/backwardisation?
The basis is backwardisation because the futures price is below the expected
future spot price
(ix) Basis trade:
Buy basis trade - The trade leads to a loss when the price is greater than
$5209.30.
Sell basis trade - The trade leads to a loss when the price is less than $5209.
If the basis moves towards zero,the price is decreasing. Therefore, an investor
should buy the basis trade by buying the Future
(x) Risk in basis trading
It is risky because the data available on BTC is limited- Bitcoin is a relatively
new asset.
Furthermore, Bitcoin prices are extremely volatile
Lastly, the market is not regulated
(xi) Hedge against Bitcoin price falling
If it is assumed that prices of Bitcoin will fall in the future, I would buy the
futures contract. Reason being it will ensure I can lock the price at $10,414
(5205*2) for 10 bitcoins in 6 months.
END OF ASSIGNMENT.
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