On May 10, 2021, 50 millions call warrants BI-XYS@EC2112A (26099.HK) have been issued
at HK$0.250 per warrant by BOCI Asia Limited1 on the underlying asset Xinyi Solar Holdings
(Xinyi Solar Holdings, 0968.HK). The warrants are European style, cash settled with maturity
T = Tuesday 13 December 2021, strike price K = $12.38, and entitlement ratio 10. See here,
here, here, and there for more information.
The goal of this assignment is to construct a real-time, step-by-step self-financing portfolio
hedging strategy for one call option = 10 call warrants BI-XYS@EC2112A. Nine questions
have to be completed within a precise time frame in order to get credit:
• Question t = 0: before Monday November 15 at 09am. (2 marks)
• Question t = 1: before Thursday November 18 at 09am. (2 marks)
• Question t = 2: before Monday November 22 at 09am. (2 marks)
• Question t = 3: before Thursday November 25 at 09am. (2 marks)
• Question t = 4: before Monday November 29 at 09am. (2 marks)
• Question t = 5: before Thursday December 2nd at 09am. (2 marks)
• Question t = 6: before Monday December 06 at 09am. (2 marks)
• Question t = 7: before Thursday December 09 at 09am. (2 marks)
• Question t = 8: before Monday December 13 at 09am. (up to 6 marks)
For Question t = 8, up to 6 marks will be given based on how close your portfolio value VT will
get to the call option payoff (ST −K)+ observed at market closure on Monday December 13.
Superhedging is allowed and gives full mark, but no extra credit.
Note that trading on BI-XYS@EC2112A (26099.HK) may be suspended as of Tuesday Decem-
ber 07.
In order to get full mark for Questions t = 0 to t = 7 you need to input, before each deadline,
• the required market quotes St (underlying price) and Pt (option price);
• your choice of a self-financing portfolio (re)-allocation (ξt+1, ηt+1);
• your portfolio tracking error Vt − Pt.
The assignment is implemented in a LAMS sequence. Answers are recorded only after pressing Add record and no change is possible after that. To move on to the next question, click on Next Activity .
1Warrant hotline: + 852 3988 6909. Do call for further information. Consult the listing document .
Notes
• In this assignment we are on the side of the option issuer (BOCI Asia Limited), and we
manage a portfolio that aims at delivering the option payoff (if any) at maturity December
13, 2021.
• In Question t = 0 the initial portfolio value V0 must match the latest known market option
price P0, i.e. the initial tracking error V0 − P0 should be zero.
• The risk-free rate is taken equal to r = 0, the riskless asset price is At = A0 = $1, and we
do not consider transaction costs.
• The portfolio self-financing condition
ξtSt + ηtA0 = ξt+1St + ηt+1A0,
should be satisfied in each question t = 1, 2, . . . , 8.
• It can make sense to try minimizing the portfolio tracking error Vt−Pt at every time step.
• Unchanged portfolio allocation is allowed at any step, but should also be recorded by the
deadline.
• All quantities ξt, ηt can be positive, negative, and/or fractional due to holding, shortselling,
borrowing, or lending.
• The assignment settings do not allow for backtracking and any input will be considered
final, as in a real-life trading environment.
• Trading limits: you are not allowed to hold or shortsell more than 5 (five) units of the
underlying asset at any time.
• Please limit your input to five significant digits.
In addition to your own market intuition, the tools that can help to determine your portfolio
allocation include:
• a CRR Python 2 calibrated on 8 time steps;
• a Black Scholes , see also here.
Financial data with R
The R package quantmod is installed through the following command:
1 install.packages("quantmod")
1 library(quantmod)
getSymbols("0968.HK",from="2020-05-10",to=Sys.Date(),src="yahoo")
3 stock=Ad(`0968.HK`)
chartSeries(stock,up.col="blue",theme="white")
5 abline(h=12.38,col="red",lwd=3)
November 11, 2021 - 10:35
2Right-click to save as attachment (may not work on
)
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2

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