Course Project for Economics of Investments 643

Johns Hopkins University
 
This assignment is to count for 25% of the course grade if it is accepted. Students may, either individually or in groups of 2, 3 or 4, work on any one of the projects described below. Students should sign up by email to the course instructor (either as individuals or in groups) for one of the projects listed below on or before February 5. Groups made up of one, two, three or four students will list each of their names together in this email to the instructor, and, if their project proposal is accepted, will receive a confirmation from the course instructor. The projects are offered on a “first-come, first-serve” basis; that is, no more than a single student (or group) will be permitted to work on any given project unless otherwise noted below (that is, there are some exceptions). Students must inform the instructor by February 5 of their intent to complete the project and whether they intend to do so in a group along with that group member or members, if any, and subject to the limitations discussed above. Please inform the instructor as soon as possible if you change your mind about doing a project so that another student group might be able to choose it prior to February 5. Students should not submit projects that have been or will be submitted in other courses. Students who wish to discuss customizing their own projects may negotiate terms of this other project type with the course instructor, who should approve it before work commences. The project will be due May 12.

If applicable, students are expected to develop "user-friendly" and entirely original spreadsheet files of professional quality capable of performing one of the tasks listed below (or a satisfactory alternative as discussed with the instructor). The selected file should be original and not have been used before in any other class, and not a file adapted from one on the Internet or from another project. The spreadsheet files should include appropriate documentation, VBA code and/or macros as is necessary to run the file in a very user-friendly setting. Students should discuss their projects with the course instructor, particularly students not selecting one of the sample projects listed below. Students are encouraged to assist each other, to test each others' programs and to "work out bugs" in each others' programs. The spreadsheet files should be usable in Excel from MS Office 2007 or Office 2019. I emphasize that the package should be user-friendly with detailed on-screen instructions, macros and/or visual basic routines as necessary to ensure this. The project should include adequate documentation for its use by anyone familiar with the analytical technique and the financial problem. It should be assumed that the user has no familiarity working with the group's spreadsheet and will not remember any verbal instructions given by students.

As always, do be aware of and follow all AAP and JHU rules, policies and guidelines concerning all assignments. In all cases, students should carefully cite any work, paper, book, article, Internet site, electronic communication or software, whether published or unpublished, that was consulted or otherwise used as a reference for their own work. Any material that was copied or paraphrased into a student’s work must be appropriately footnoted (end-noted or otherwise cited) along with appropriate publication or other details. Sufficient information should be provided in the citation for the instructor or other reader to access the referenced material as easily as possible. Any non-written materials (e.g., oral communication, television, etc.) must be cited as well. Appropriate style manuals can be consulted for citation style. All projects are to be considered to be independent projects, completed without assistance of others except for the course instructor, and members of the student's project group, though outsiders including other students may be used to test the project. Authors of any written material should take great care in ensuring that their papers are well-written and conform to appropriate style and Institute academic honesty guidelines. Students should not copy code or other material into their files from outside sources. Groups and their members should not collaborate or share work or information with other students and groups in the preparation of this project, though, of course, students working together in a group should collaborate with other members of their group. And again, students may use outsiders to test and comment on the usability of their projects.


Projects

Spreadsheet-Based Projects

1. Options Analysis in a Binomial Environment
The user of this package should be able to employ this package to value plain vanilla options (European and American, calls and puts) on a stock or other security as the instructor approves (with or without dividends payable as frequently as quarterly) in a binomial framework (up to 100 time periods), determine "deltas" and obtain implied variances. Early exercise opportunities should be identified where relevant. The package should work with calendar time inputs. Such a package can be very useful for valuing American options, particularly puts, as well as calls on dividend-paying stocks. The project should incorporate early exercise features as well. Make certain that you or someone in your group is at least marginally competent to use VBA. This part is remarkably simple to accomplish. If you are clueless now, have a look at the Introduction to VBA on the course web site. You might be able to create your own basic VBA programs to do something useful within a half hour. There are plenty of web sites that will answer your questions when you have them. If you are clueless now, have a look at the Introduction to VBA page on the course web site. You might be able to create your own basic VBA programs to do something useful within a half hour. There are plenty of web sites that will answer your questions when you have them.(2 Groups Maximum with 1-4 students each) 

2. Fixed Income Portfolio Dedication
          This is a more quantitatively-oriented project, enabling the student to create a practical and usable automated spreadsheet application package. The user of this Excel spreadsheet package should be able to input relevant price and contractual information from coupon or pure discount bonds to hedge against a fixed cash flow stream. The file should be able to handle data for up to thirty bonds making interest payments on either an annual or semiannual basis. Cash flows from these bonds will be matched against cash flows of an equivalent series of cash flows associated with institutional liabilities. Allowing for matrix inversion with potentially many sizes of matrices may require a little creativity (VBA or the Excel Offset function might be helpful here). Students are expected to develop "user-friendly" and entirely original spreadsheet files of professional quality capable of accomplishing this task.  (limit: 2 groups with 1-4 students each)

3. Fixed Income Portfolio Immunization
          This is a more quantitatively-oriented project, enabling the student to create a practical and usable automated spreadsheet application package. The user of this Excel spreadsheet package should be able to input relevant price and contractual information from coupon or pure discount bonds to hedge against a fixed cash flow stream. The file should be able to handle data for up to thirty bonds making interest payments on either an annual or semiannual basis. Portfolios of bonds will have their durations and convexities matched against durations and convexities of a series of cash outflows associated with institutional liabilities. Allowing for matrix inversion, if it is necessary for your configuration, with potentially many sizes of matrices may require a little creativity (VBA or the Excel Offset function might be helpful here). Students are expected to develop "user-friendly" and entirely original spreadsheet files of professional quality capable of accomplishing this task.  (limit: 2 groups with 1-4 students each)

4. Exotic Options Package
The user of this friendly package should be able to perform relevant valuation and hedging calculations on one or more types of non-plain vanilla derivative securities (including exotic options such as Lookbacks or Asians, compound options and CDS's or other swaps, but excluding plain vanilla options) to be determined jointly by the course instructor and the student. You must obtain approval from the instructor before proceeding. After doing so and confirming with your instructor, pick an exotic option or swap contract series that interests you (e.g., lookback, Asian, chooser, etc.). Make certain that you or someone in your group is at least marginally competent to use VBA. This part is remarkably simple to accomplish. If you are clueless now, have a look at the Introduction to VBA page on the course web site. You might be able to create your own basic VBA programs to do something useful within a half hour. There are plenty of web sites that will answer your questions when you have them. Learn the Greeks for plain vanilla options and apply your knowledge appropriately to the set of exotic options or swaps that you select. (1 Groups Maximum) 

5. Monte Carlo Simulation
The user of this package should be able to perform a Monte Carlo Simulation to make particular types of either fixed-income or derivatives-based valuation and hedging decisions. Examples of applications can include capital budgeting decisions involving real options analysis, American options valuation, fixed-income hedging under stochastic interest rate structures, path dependent options valuation, constrained optimal portfolio weights computations (with constraints on minimum and maximum weight levels for relevant derivative securities), etc. Details regarding this project would be determined jointly by the course instructor and the student. Care should be taken to ensure that this project does not replicate a similar project which might have been or will be used for another class. You must obtain approval from the instructor before proceeding. (2 Groups Maximum, each with 1-4 students)

Other Projects

4. Derivatives Trading Project
Students who wish to engage in paper or virtual trading of derivatives can make a project of it for this course. The first step is to find a suitable trading simulator for this purpose, as JHU does not subscribe to academic trading simulators such as FTS, Rotman or Trader-X. But, there are a number of online alternatives. Link here to a detailed description of this trading project. (No limit on the number of groups)

7.  Case Study/Presentation: Robinhood IPO
    After a winter of bad publicity and significant controversy, Robinhood, a retail broker with many smaller client accounts made plans to file for its IPO in the Spring of 2021. As Robinhood claimed to seek "democratization" of securities markets through its trading platform and commission-free trading, it claims that its entry into IPO markets will work towards democratization of IPO markets. (1 Group Maximum with 1-4 students)

5.  An Alternative Project
A project not from the above list. This project, either in a spreadsheet format including VBA or a fully-compiled C++ or Python format will perform a function subject to specifications agreed to by the student and the instructor. You must obtain approval from the instructor before proceeding. (No limit on the number of groups)
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updated 01/20/2023