Portfolio Project

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Université Nice Sophia Antipolis
Institut d'Administration des Entreprises

This paper is submitted in the context of the following subject:

Portfolio Project

Risk & Stock Market

M2 EUROPEAN AND INTERNATIONAL PRIVATE BANKING

Submitted by: Instructor:

KAKAVAND Samaneh EGRET Paul
DOU Yan

Academic Year 2012/2013

Introduction:
Global Economic & stock market Performance: Mixed signals January 2013 is a great month for stock market. Since January, the stock market goes up, so maybe this stock market bulls will keep running in the whole year, especially, the Dow Jones Industrial Average is increasing dramatically, from 12520 in July 2012 to 14275 today.

Source: Google Finance
One potential reason for the optimism is a positive sense of global economy in the future; the euro zone is not going to break up, because in September 2012, European Central Bank promised unlimited bond-buying to keep the euro together; China has avoided a hard landing, America avoided falling off the fiscal cliff. Additionally, Federal Reserve agreed to keep interest rates down to help encourage investment and decrease the unemployment rate. Based on the above economic performances, we can argue that the share prices will go up, because the global economy is recovering from recession. Since the bonds yields will keep running low in 2013, investment in equity market is a more reasonable choice.

However, market risk and uncertain can never be ignored. The biggest reason for caution is the gap between stock-market optimism and economic reality. The gap is widest in Europe: Euro-zone may keep the single currency, but its economies are still in deep trouble: the IMF expects the euro-zone economy to shrink by 0.2% this year. It will a long to go to get rid of recession. With more fiscal austerity ahead and credit tight, it is hard to see how Euro-zone returns to growth.

Source: Yahoo! Finance
Strategy:
Due to these reasons, our investment strategies are as follows: * as bonds yield will keep low in this year, we choose invest only in equity market, including stocks and stock index futures. * as Euro-zone cannot recover from recession in a short time, we will invest only in the USA stock market, because the investment in the European stock market is too risky. * as the future of global economy is still uncertain, we will invest in a short period--3 months, in 9 different stocks in diversified sectors—consumer products, technology, utilities, health care and energy, * We intend to use put options to hedge stock risk and futures contract to hedge currency exchange risk.

Stock index futures:
Description: stock index futures are financial futures in which the underlying asset is a group of stocks included in one of the major stock price indexes such as S & P 500, NASDAQ 100, Dow Jones Industrial Average, etc. As in other futures markets, traders in stock index futures will generally earn profits or suffer losses when they settle a contract.

Advantage:
* Low transaction costs: relative to traditional methods of managing market risk, stock index futures are inexpensive because the transaction costs of establishing a futures position are low. For example, the cost of establishing and settling a position in DJIA index futures contract is only $10.

Disadvantage:
* High risk: one important limitation is that index futures cannot provide protection against firm-specific events.
Strategy:
* invest 10% in the DJIA index futures in 6 months: 130700$ * hedging currency risk: USD future contracts for 65350$

Chart:Source: Yahoo! Finance

Analysis:
Dow Jones Industrial Average Index is 14,253.77
From the above chart: the lowest index is 12100 in July 2012 and the highest index is 14253 today. * If index increases by 200 and becomes higher than 16253, we sell shares and generate profit. * If index is between...
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