an arbitrage, delta-neutral strategy 

dentify an option (in any market in the world) that you believe is mispriced. Explain, illustrate and justify clearly why you think the instrument is mispriced.

Develop an arbitrage, delta-neutral strategy that will make money from the mispriced derivative. Specifically, detail the minimum costs of undertaking this strategy and pursuing it. You can use as much money as you like. Given that the strategy is theoretically risk free, you should not lose any money anyway!

Every week you are responsible for adjusting your delta-neutral portfolio. Make a record of all transactions and profit / loss of the strategy. You are required to show evidence of at least two adjustments (even if it was advantageous to close-out early – you can discuss this in your report). Write a report detailing all your transactions and the rationale behind them.


Part B

Retrospectively, it is possible to determine if your belief in the option you thought was mispriced in Part A was correct or not. Once you have completed Part A (requiring at least holding the position for 3 weeks – one week you form the portfolio and 2 subsequent weekly delta re-balances) go back and using historical data determine if the option was truly mispriced and whether you took the correct positions to benefit from the mispricing. Discuss your methodology for examining if the option was mispriced in your report and your interpretation of the results in this new light.

REPORT WRITING The report must document a list of transactions and dates they were executed. The document must then discuss everything from the process including such items as:

  • Transaction costs used for all transactions, with evidence that it is a realistic figure.
  • How the mispriced options were identified.
  • How risk neutral portfolios were formed and why.
  • When would have been the best times to close out positions.
  • Explanations and reasons for the performances.
  • Performance analysis and discussions of how things could have been improved.



The above 6 items will form the crux of what you will be assessed on, along with presentation and concise writing skills. Your report length can be a MAXIMUM of 12 pages (Size 12 font, single spacing), including all discussion, graphs, tables and references.