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LYON FANNE CASE Options and Futures - Dec 2004 Introduction We divided our report in three parts which correspond to three steps we made to solve the problem of the case In order to help Professor A Lyon Fanne to decide whether he should close his position or not on the future contract we first analysed the research made by the professor about the January effect then we focused on his investment strategy and finally thanks to the two precedent parts we took a decision Step I Research on the January effect Lets come back on the analysis that Professor ALyon Fanne made on the January effect Thanks to the professors research reported in the exhibits we can analyse 60 years of data from 1926 until 1985 and make some assumptions to build a kind of model which leads to the final strategy First we can remark that over 60 years from January 1926 until December 1985 small firms provide a higher return in January higher than the rest of the year and higher than the companies which are incorporated in the SP500 index Indeed the table Strategy comparisons small-firm stocks and SP500 geometric mean annual return in Exhibit 1 shows us that you obtain an annual return of 1577 when you hold the small firm portfolio during January and SP500 index the rest of the year whereas you obtain a return of 1256 when you buy and hold the small-firm portfolio and only a return of 984 when you buy and hold the SP500 index Moreover even during a downturn period like January 1926 - December 1934 the small firms portfolio still provides a significant higher return in January The SP500 index provides a return of 202 during this period the small-firms portfolio gives a negative return -332 but holding the small-firms portfolio during January and the SP500 the rest of the year is again the
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