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What am I required to do in this assignment?
Data:
The uploaded Excel file contains data for your assignment. Sheet1 contains the weekly prices of different stocks, which will act as underlyings for the options in this assignment. Each of you will be assigned to one stock. Sheet 2 details the trading strategies assigned to each of you. Sheet 3 contains the option and the position assigned to each of you for dynamic delta hedging.
Requirements:
You must use Excel to complete this assignment. You will submit both the Excel file and the report. The report needs to be typed and presentable. The report must address each of the tasks below. Do not restate the questions in your report. Your report has to be understandable as a stand-alone piece of work without referring to the Excel file. You can include the graphs/ tables/ from Excel to address the questions, but do not detail the process of how you create them. The process will be visible in the Excel file.
In the Excel files, you need to labelled the questions clearly.
Tables and graphs need to be carefully labelled.
Today is 04 Jan 2021. Given your assigned underlying (Excel sheet 1), and the four options below:
Today is 04 Jan 2021. The current risk free rate is 5% continuously compounded. Given the following American put option on your assigned underlying (Excel sheet 1):
After completing the above tasks, critically reflect on the experience you had by doing this task, addressing the challenges that you have faced, how would you overcome them I the future, how the above exercises can be applied to real life problems and how it will enhance your personal skills developing you as one of the potential global leaders.
European Call 1: K = $94, T = 6 months
European Call 2: K = $110, T = 6 months
European Call 3: K = $102, T = 6 months
European Put 1: K = $94, T = 6 months
European Put 2: K = $110, T = 6 months
Two specific trading strategies are assigned to each of you (Excel sheet 2). For each trading strategy, you need to do the following:
Explain how the strategy is constructed using the given options in this question. Explain the purpose of the trading strategy as well as their advantages and disadvantages.
Provide a detailed profit graph and a table listing the profit and loss in each position as well as the total profit and loss of the whole strategy depending on the values of the underlying.
How can the strategy be used for hedging?
K= 100
T= 30 weeks
Compute the annualised standard deviation of your underlying.
Compute risk-neutral probabilities.
Price an American put option with a 30-period binomial tree using Risk-Neutral approach.
Compute delta, gamma, vega and rho of an European put option with the same strike, underlying and time to maturity as the American put option above.
Today is 04 Jan 2021. The current risk free rate is 5% continuously compounded. Given the price movement of your underlying, create a table detailing the following:
Time-varying delta of the option assigned to you (Excel sheet 3), given the implied volatility of your option is 30% and the option matures in 52 weeks.
The actions you take each week to maintain delta neutrality of your option position, the cashflows associated with each action, and the cumulative cost of hedging, given the option size is 100,000 stocks.
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