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Please submit your work as one Excel file, showing all your calculations. Set up one worksheet per question. In each worksheet mar your answers very clearly. Create a clearly labeled cell (or cells), say “Answer:” and highlight your answer.
Question 1 [10 Points].The Option for the Undecided. A call option has a positive payoff if a stock is above a strike, so you would buy a call option if expect stock price increase. A put option has a positive payoff if a stock price is below a strike, so you buy a put option if you expect stock price to decrease. But what do you do if you expect the stock price to move, but you are not sure in which direction? Maybe up, maybe down?
Consider the following option. The stock price right now is S_0=100.00. The maturity of the option is two years, T = 2.0. If the stock price at maturity, S_T is greater or equal to X_1=120.00, then you get paid 95% of the difference between the stock price and X_1, 0.95*(S_T-X_1 ). If the stock price at maturity, S_T is smaller or equal to X_2=90, then you get paid 75% of the difference between X_2 and the stock price, 0.75*(X_2-S_T ). For all other stock prices, the option pays you zero. In sum, the payoff on the option is
H(S_T )={■(0.75*(90-S_T ),&S_T≤90@0.00&90 Step 1:- Click on Submit your Assignment here or shown in left side corner of every page and fill the quotation form with all the details. In the comment section, please mention Case Id mentioned in end of every Q&A Page. You can also send us your details through our email id support@assignmentconsultancy.com with Case Id in the email body. Case Id is essential to locate your questions so please mentioned that in your email or submit your quotes form comment section. Step 2:- While filling submit your quotes form please fill all details like deadline date, expected budget, topic , your comments in addition to Case Id . The date is asked to provide deadline. Step 3:- Once we received your assignments through submit your quotes form or email, we will review the Questions and notify our price through our email id. Kindly ensure that our email id assignmentconsultancy.help@gmail.com and support@assignmentconcultancy.com must not go into your spam folders. We request you to provide your expected budget as it will help us in negotiating with our experts. Step 4:- Once you agreed with our price, kindly pay by clicking on Pay Now and please ensure that while entering your credit card details for making payment, it must be done correctly and address should be your credit card billing address. You can also request for invoice to our live chat representatives. Step 5:- Once we received the payment we will notify through our email and will deliver the Q&A solution through mail as per agreed upon deadline. Step 6:-You can also call us in our phone no. as given in the top of the home page or chat with our customer service representatives by clicking on chat now given in the bottom right corner. We use best scientific approach to solve case study as recommended and designed by best professors and experts in the World. The approach followed by our experts are given below: Defining Problem The first step in solving any case study analysis is to define its problem carefully. In order to do this step, our experts read the case two three times so as to define problem carefully and accurately. This step acts as a base and help in building the structure in next steps. Structure Definition The second step is to define structure to solve the case. Different cases has different requirements and so as the structure. Our experts understand this and follow student;s university guidelines to come out with best structure so that student will receive best mark for the same. Research and Analysis This is the most important step which actually defines the strength of any case analysis. In order to provide best case analysis, our experts not only refer case materials but also outside materials if required to come out with best analysis for the case. Conclusion & Recommendations A weak conclusion or recommendations spoil the entire case analysis. Our expert know this and always provide good chunks of volume for this part so that instructors will see the effort put by students in arriving at solution so as to provide best mark.
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Question 2 [15 Points].The Option to Exchange one Asset for Another. This option belongs to the class of “Rainbow Derivatives Contracts” (see class notes for numerical methods). There are two stocks, Pfizer (PFE) and Merck (MRK). Stock prices today are: S_(0,PFE)=$40, S_(0,MRK)=$40. The correlation between returns on these stocks is ρ=0.75. The standard deviations are: σ_PFE=0.35,σ_MRK=0.25. The risk-free rate is r=2%. Time to maturity of the option is T=1.5 years. The stocks do not pay dividends.
The option gives you the right, but not the obligation, at maturity to give away 1 (one) share of Merck and to receive 1 (one) share of Pfizer.
Set up the spreadsheet to price this option by Monte Carlo simulation. For each simulation (each row) you will have to generate two uniform random variables, then convert each uniform random variable into a normally distributed random variable, then turn these two uncorrelated normal random variables into two correlated random variables (see class notes on Rainbow derivative contracts).
1. Use 5,000 simulations (rows) to determine the price and the standard error of the price of this option.
2. Use 15,000 simulations (rows) to determine the price and the standard deviation of the price of this option.
3. What happens to the price of the option if correlation between the two stocks decreases to become ρ=-0.25? What happens to the price if the correlation increases to ρ=0.975?
Question 3 [5 points].Black-Scholes Option Pricing.Consider a regular call option. Stock price today is S = 50.00. Strike price is X = 60.00. Time to maturity is 18 months. Risk free rate is 4.5%. The call option is selling for $5.0593. What is the implied volatility (sigma)? [Use Black-Scholes call option pricing formula to find implied volatility. Program it in Excel and use Solver to find the value of sigma).
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