relative performance of two assets

This course requires that you complete a project. The project is introduced in this module. You will be required to submit your project in two parts:
– Part 1 is submitted as part of this module.
– Part 2 is submitted as part of module 12.
Project overview
Futures and exchange-traded options are widely available for the following asset classes:
Equities
Interest rates
Energy
Agriculture
For each of these asset classes, please develop a well-reasoned hypothesis regarding the relative performance of two assets within the asset class. A relative performance trade (otherwise known as a pairs trade) does not require you to identify whether a given security will increase or decrease or value. Instead, it requires the following:
1. Identify two assets within the asset class.
2. Identify which of the two assets you believe will outperform the other asset.
3. Long the asset that you believe will outperform and short the asset that you believe will underperform.
You can learn more about relative performance/pairs trades here: http://www.investopedia.com/articles/trading/04/090804.asp.
Relative performance trade example
Here is an example of a relative performance trade.
Imagine you are forming a relative performance hypothesis related to the following two stocks in the apparel stores industry:
Gap, Inc.
TJX Companies
You do not know whether the overall stock market will increase in value or decrease in value in the future. But you do believe that whether markets increase or decrease in value, GAP, Inc. will outperform TJX Companies. Therefore, you should long Gap, Inc. and short TJX Companies. If you do so:
– If markets increase in value, your long position in Gap, Inc. will increase in value more than your short position in TJX Companies will decrease in value.
– If markets decrease in value, your long position in Gap, Inc. will lose less money than your short position in TJX Companies will earn in value.
Project details
For each hypothesis, please develop an exchange-traded derivatives trade that can monetize the view. Hence, derivatives that do not trade on exchanges, such as forwards, credit default swaps, or interest rate swaps, should not be used. Only use derivatives do not use any cash products such as stocks or bonds.
Please assume that you have up to $1,000,000 to allocate to each strategy (for the purpose of premiums and/or margin).
Please assume that you will acquire the position sometime during this week and will hold it until sometime during the week of Module 12. Please do not develop dynamic strategies that require buying or selling between this week and the week of Module 12. So there will only be two relevant dates:
The date you enter into the position, sometime this week.
The date you close out the position, sometime during the week of Module 12.
Some data sources from which you can identify information include:
www.CBOE.com
www.CMEGroup.com
www.onechicago.com
www.Optionmonster.com
http://finance.yahoo.com/futures
http://finance.yahoo.com/options
You may also use the Bloomberg Terminals available on Pace’s 1 Pace Plaza, White Plains, and Pleasantville campuses.
Project deliverables
This project has two deliverables, as follows:
Deliverable 1: Please submit this week a report that describes your hypotheses and trades in detail (a link is provided below the project description through which you should submit Deliverable 1). Make sure that your plan is as realistic as possible, and incorporates all premiums and margin/collateral requirements. Your report should be 9 pages in length and should include the following sections:
As detailed in the project description, the first deliverable requires that you submit a 9 page document, consisting of a summary page and a 2-page writeup per asset class strategy. Of these 2 pages per asset class, the first page consists of your hypothesis as to why one position will outperform the other position. The second page shows how many contracts to enter into given the $1 MM allocation for margins and/or premiums and shows the data (using screen grabs) from the data source. So the pages are as follows:
Page 1: Summary
Page 2: Equities hypothesis
Page 3: Equities number of contracts + data screen grabs
Page 4: Interest rates hypothesis
Page 5: Interest rates number of contracts + data screen grabs
Page 6: Energy hypothesis
Page 7: Energy number of contracts + data screen grabs
Page 8: Agriculture hypothesis
Page 9: Agriculture number of contracts + data screen grabs
Please also keep in mind that you dont develop separate hypothesis for the long + short position to each pairs trade. After all, as detailed in the project description, you are not hypothesizing that one will increase and the other will decrease. Instead, you are hypothesizing that one will relatively outperform, regardless of how markets do. In terms of grading, I will be looking for the following: Has the student followed the requested structure? Are the hypotheses thoughtful and useful, or superficial and useless? Has the student performed and presented all necessary calculations, and are they reasonable? Finally, have the data sources (i.e., data screen grabs) been provided?

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