FIN 351 Principles of Investments Essay Assignment
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages Description/Paper Instructions
Learning Exercise 6
FIN 351 – Principles of Investments
Options
Instructions for the Submission of this LE
- Before working on this part, please study Lectures 7 and 8 and work through posted examples (both in Word files and Excel files)
- Please submit your final report for this LE in Word format. It should be ONE file for both: Part 1 and Part 2.
- You need to write your report as a continuous document.
- For Part 1, please provide detailed solutions (use my posted solutions as examples). This is your last chance to practice before the exam.
- For Part 2, please address all deliverables.
- Use Excel for your calculations and submit your Excel file with these calculations separately. Please separate Parts 1 and 2 in two separate spreadsheets in the same file.
Part 1: Theoretical Problems
- An investor sells a European call option with strike price of E and maturity and buys a put with the same strike price and maturity on the same underlying asset.
- Create a payoff table of this position at expiration
- Show this payoff on a graph
- The price of a non-dividend paying stock is $19 and the price of a three-month European call option on the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the price of a three-month European put option with a strike price of $20?
- The price of a European call which expires in 6 months and has a strike price of $30 is $2.00. The underlying stock’s price is $29 and a dividend of $.50 is expected in 2 months and in 5 months. The term structure is flat with all risk free interest rates being 10%. What is the price of a European put option that expires in 6 months and has a strike price of $30? (Hint adjust the put call parity for dividends).
- Three put options on a stock have the same expiration date and an exercise price of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread could be created. Construct a table showing the profit from the strategy. For what range of stock prices would the butterfly spread lead to a loss?
- The price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a one-year European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options.
- Construct a payoff and profit/loss table
- Draw a diagram illustrating how the investor’s payoff and profit or loss at expiation.
Part 2: Empirical Work
- The problem
Chose a stock that interests you as an underlying asset for your options. Assume that you have a substantial long position in this stock and would like to stay invested and maintain your position in this stock for a long term. The market conditions are currently quite uncertain and you are not sure whether the price of your stock will move substantially up or down, but you wish to benefit from either outcome. The two possible option strategies to achieve your goal are:
- Deliverables
- In your report, briefly explain why you like your chosen stock.
- From Yahoo Finance (or any other data source), download daily prices and dividends on your chosen stock for the last 500 days (approximately two years).
- Calculate daily returns as:
where is a daily, continuously compounded return between day and the next day, . represents the dividend (if any), paid during this period, and is the price of your stock at time .
- Estimate µ (annualized mean return) and s2 (annualized variance)[1] for your stock returns. Present these estimates in your final report. Also report the current price of your stock.
- Choose one of the two option strategies mentioned above. In your report, describe which options are involved (i.e. a call or a put, or both, European or American).
- Choose strike (exercise) prices for the options involved in your chosen strategy. Briefly explain reasons that you used to choose these particular strike prices.
- Construct a payoff table and draw the payoff diagram for your option strategy, using your chosen strike prices. Present this table and this graph in your report.
- Choose the expiration time (less than a year); it should be the same for all options. Do not forget to express this time in annual terms.
- Assume that the risk free rate is 0.5% per year,
- Use a 4-period binomial model to value your options:
- Explain how you calculated parameters of the binomial model (and show details of your calculations. Use regular formulas in symbols and then show how you plug numbers into them (Excel formulas are not substitutes for that).
- “Draw” binomial trees (you can use Excel for this and then just copy your tree for the Excel file to your Word file).
- Using formulas, show how you find payoffs at expiration for each option.
- Show all calculations, which you do when you “work the tree backwards” to find option prices. It is a lot of similar calculations, but it is a good practice.
- Use the Black Scholes option pricing formula to price your options
- Show all calculations in details using formulas in symbols first. For this you clearly need to use the Word equation editor[2].
- Then show how you plug your numbers into these formulas.
- Now that you have prices for your options (use those obtained applying the Black Scholes formula), calculate and report the cost of your strategy.
- Construct a profit/loss diagram for your strategy using your payoff diagram from Deliverable 5 and subtracting the cost from Deliverable 10. Present this graph in your report.
[1] Use AVERAGE and VAR.S function in Excel to find daily mean and variance first. You will need to multiply both of them by 252, the approximate number of trading days per year.
[2] Please see the posted tutorial if you have not used it before.
RUBRIC
QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points: Student failed to submit the final paper. 20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. 40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. 50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. 5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. 10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. 15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points: Student failed to submit the final paper. 5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors 10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points: Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. 10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper. GET THIS PROJECT NOW BY CLICKING ON THIS LINK TO PLACE THE ORDER
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