Financial Engineering

You are asked to prepare a short report (more details on how this should look are given later) on how you created the security (no more than 1000 words in total for parts 1 and 2) to include:

Part 1. A term sheet. By this, I mean the kind of one page outline of terms as used in the course. This should be in layout and format as per the way these are prepared and presented and similar to those provided by investment banks and distributed by the sell-side of an investment bank as an originator. This should be fully integrated with the pricing you have for the BRC.

For this term sheet, I would suggest an issue size of 10 million, but you can vary this if you wish. You d o not need to include any fees or commissions in your analysis and term sheet.

Part 2. A brief explanation for the rationale for the choice of company whose common stock (or ordinary shares) are used for the BRC. It will need to be a public company listed on a suitable stock exchange and for which you have appropriate data (you will need at least a 12 months of stock price history. In doing this, you need to explain why, given the structure of the BRC you chose this company for the exercise and most important why this company would make the BRC appealing to end investors (i.e., risk characteristics, age, industry, and other such factors). You can choose any exchange-listed firm in any market.

This section should also include the risk-reward element of the final structure. That is, it should provide the investor who reads your term sheet with the key risks and rewards that arise from the security's structure. This table is a standard feature of security issuance and should fall out of the way you have constructed the structure and your explanation of the stock that is used for the BRC security.

Note: You are expected to go beyond simply restating the risk factors that are in a term sheet for a standard security issue by justifying these risks as having a significant impact on the security and including others that are not usually included.

Part 3. Apply your knowledge of financial engineering gained on the course to "price" up the BRC for the company you have chosen using (a) a suitable option-pricing model; and (b) based on current market conditions. That is, use financial market data that relates to the period of your assignment and is contemporary. Hence, if the submission date is April, you need to make use of data that is current for March-

April, although you will need to set a cut-off date to allow for the modelling and the writing up and submission. This is fine as we are not pricing the model for commercial purposes and in real time.
Your analysis needs to be integrated in the correct way with the choice of stock you have made for the BRC in Part 1.
You will need to build a quantitative model. This is likely to involve a spreadsheet that is suitably granular.3 If using a binomial option pricing model, it has to have 4 or 5 steps minimum-or another appropriate option pricing model as per the material discussed on the course. Use this to calculate the key values for the structured security that becomes the input into your term sheet.

Part 4. Think of the analysis here as a "conceptual model" of the structure that will allow you to vary the constituent parts to understand what changing the "mix" will do the security's price, performance, and risks. Copy and paste this analysis in an easily understandable format into an appendix of your report. (This is not part of the word count.) Key considerations in so doing:

a. The model should be self-explanatory to the reader so that they can understand how it is constructed and what it shows.
b. This model should include the structuring of the note.
c. All steps need to be fully explained.

Note: You are not allowed to simply "borrow" one of the many freely available option pricing models that are available online. I need to see how the option pricing was done, so you will have to price the option and show how the price was calculated. This includes explaining where the input variables are obtained and why they are reasonable. (I am not expecting pinpoint accuracy in these, just that they are reasonably in line with current market conditions when you priced the security.)

Attachment:- Financial Engineering.rar