Reference no: EM13960769
Final Project – FIRE 650
Refer to the template spreadsheet provided. Stock A has an annualized volatility equal to 18% for which you have just written an out-of-the-money 26 week call option. The risk free rate is 2% per annum and the strike price is $100. There is another asset called the “index” which has an annualized volatility equal to 15% and whose returns have covariance 0.0216 with Stock A.
Express Stock A, the Index, the call option and the Forward price in column P in dollars and cents). Account for the running cost of the hedge in column N and the beta neutral hedge in column S in thousands of dollars. Express the Hedge, Exercise $, Option Sale and Profit (cells N31-N34) as well as the Forward Profit/Loss in thousands of dollars.
1. Complete column G which denotes the remaining time to expiration.
2. Model the price dynamic for Stock A in column H as Brownian motion.
3. Model the price dynamic for the Index in column R as Brownian motion.
4. Calculate Stock A’s beta to the Index in cell U2.
5. After completing columns I-J, compute the call price in K2 and then fill in the dynamic call prices to expiration (K3-K28).
6. Estimate the option’s delta in column L and construct the dynamic delta hedge in columns M-O assuming the interest rate is 2% per annum.
7. In cells N31-N33 link in the cost of the Hedge, the revenue received should the option be exercised and the cash flow from the sale of the call option. In cell N35, compute the Net Profit from this hedged short position. (Hint: in cell N32 include a logical operator that can tell whether the option finishes in the money or not: “=IF(H28>A2,1,0)*100*100”. Note in cell O32, I have code that “prints” whether the option is OTM or ITM).
8. Short a forward contract on Stock A and show how the price of the forward changes through time in column P. Construct and label a graph of the spot and forward prices and identify the “basis” on the graph with an arrow and a text box.
9. In cell Q28, calculate the profit from the short forward contract in week 26.
10. Finally, suppose that you are long 100,000 shares of Stock A and want to hedge downside risk using the Index. Construct the value of the beta neutral hedge in column S.
Your spreadsheet should have highlighted the net Profit from the dynamic covered call strategy, the profit from the short forward and the beta neutral hedge using the Index (all in $000).
Attachment:- Final project sheet.xlsx
|
Explain the importance of teamwork in the workplace
: Write a short speech, of 350 to 700 words, to give to your new team at your first team meeting. Explain the importance of teamwork in the workplace
|
|
List of disasters or tragedies
: Prepare an essay on one of the incidents listed below. Be sure to include: the facts of the incident and the impact it made upon public opinion. List of Disasters or Tragedies that Impacted Safety Legislation
|
|
How do legal restrictions on practice for nurses
: How do legal restrictions on practice for nurses and physicians tend to affect the observed elasticity's of substitution? Would they tend to be higher if legal restrictions were removed? Would quality of care be affected?
|
|
Factor analysis project
: Factor analysis project, Prepare a report of the results of 2 and a half double-spaced pages along with tables associated with the results. Also include a log stating the steps used in the research, and any pertinent SPSS printouts.
|
|
Refer to the template spreadsheet provided
: Refer to the template spreadsheet provided. Stock A has an annualized volatility equal to 18% for which you have just written an out-of-the-money 26 week call option. The risk free rate is 2% per annum and the strike price is $100. There is anothe..
|
|
Revenue recognition
: Revenue Recognition - Suppose for purposes of this question that Cisco closes its books quarterly. What journal entry or entries did Cisco make on October 31, 2011?
|
|
Prepare a tax memo on these issues
: Prepare a tax memo on these issues (no more than four pages), to the tax partner on this engagement, Robert Holder. You need to read Sections 382 and 108 and the related regulations to develop your solution.
|
|
Outline the k-means clustering algorithm
: Outline the k-means clustering algorithm for a set of data defined as vectors xi. Include a diagram to support your algorithm description.
|
|
Explain the role of sensitivity analysis
: Explain the role of sensitivity analysis in terms of understanding the properties of a model. In particular, address the issue of how variation in model inputs can be assessed, and why this is important.
|