estimate the percentage of the time the payout in a month

Assignment Help Accounting Basics

Reference no: EM132762167

Question - TrustyBankCo has approached Lakefield about a new "perfect foresight" contract based on the price of crude oil over the next month (20 trading days). The current price of crude oil is $16 per barrel. The new contract would allow Lakefield to buy all of its crude oil in the coming month at the lowest daily closing price that occurs in the month. Let AVG be the average price over the next month and MIN be the minimum price. At the end of the month with the perfect foresight contract, Trusty BankCo will pay Lakefield AVG-MIN per barrel. For example, suppose that AVG turns out to be $18 and MIN is $15. Without the contract, Lakefield's average cost per barrel would be $18. With the contract, Lakefield still pays an average cost of $18, but at the end of the month, Trusty BankCo would pay Lakefield $3 per barrel, thus reducing Lakefield's cost to $15 per barrel.

Of course, Trusty BankCo is going to charge Lakefield for this perfect foresight contract. In order to analyze the situation, create spreadsheet model, using the class Asian Oil example as a guide. The daily return of crude oil is assumed to be normally distributed with a mean of 0% and a standard deviation of 3% (and returns on different days are assumed to be independent).

Required -

(a) Using Excel formulae to generate values of random variables, build a spreadsheet model in the space to the right of this text box to compute the monthly payout by Trusty Bank Co.

(b) Use a data table to replicate the experiment for 100 months to estimate the fair premium (in dollars and cents). Before computing statistics, copy and paste your results to a new "frozen" payout column and use that to answer the question in the space provided.

(c) Based on the simulation results, estimate the percentage of the time the payout in a month will be more than $1.50. Show how you arrived at your answer.

Reference no: EM132762167

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