What you will learn
- Expiry and exercise timeline
- Nonlinear price and volatility shocks
- Margin and liquidity stress
- Separate a hedge objective from speculation
Expiry and exercise timeline
Build an expiry timeline showing notice, last trading, exercise and settlement where applicable. Events can occur on different dates. A position-management plan should specify who checks them and what action occurs before a deadline.
Nonlinear price and volatility shocks
Apply combined shocks to underlying price, volatility and time rather than changing one input while assuming all others stay favorable. State the valuation method and recognize that model output is not a guaranteed executable quote.
Margin and liquidity stress
Stress margin and exit liquidity as well as mark-to-market value. A position that looks acceptable at normal spreads may be difficult to unwind during stress. Include the cost of closing all legs, not just the most liquid one.
Separate a hedge objective from speculation
Distinguish hedging from speculation by reference to the underlying exposure and objective. An option position added without a defined offset may be a new directional or volatility bet even if its name includes protection.
Worked example
A scenario shows a small theoretical portfolio loss but a large cash requirement before settlement. The learner cannot conclude that the position is affordable from the terminal loss alone.
Try it yourself
Prepare a scenario workbook with separate columns for valuation loss, required cash, exit cost and contractual deadlines.
Show the worked solution
The columns should remain separate because they answer different questions. State assumptions beside each and flag unavailable data. Feasibility requires considering the timing and liquidity of obligations, not only eventual value.
Apply this to your course project
Model a futures roll and option payoff under stressed scenarios.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.