The current price of ABC stock is $24.25 per share. The standard deviation of the stock is s=30%per annum, and the risk-free interest rate (continuously compounded) is rc = 3.48% per annum.No dividends for the stock are expected.
1 Professional Masters including: Applied Finance (Incorporating Graduate Diploma in Business & Graduate Certificate in Business) FINANCIAL RISK MANAGEMENT FINA865 ASSIGNMENT SEMESTER V1 2021 Due Date: 8 May 2021, Saturday, 11:59 pm (China time) Instructions: 1. Submit ONE file for this assignment via Turnitin under tab "Assignment Submission". Particularly, click on “view/complete” (see below). 2. Then, type your first and last name -> click on “Choose from this computer” -> locate your file and then click on “upload”. 3. Type your full name and student ID on the top of the first page of your submission. 4. Penalty will apply on the late submissions as per AUT rules. 5. Plagiarism will be checked through the Turnitin system so copied material or similarities among student works will be identified. If your file is found plagiarised, then as per AUT policy that will be strictly dealt. 6. This assignment consists of the two tasks described below. 2 Task 1: (15 marks) The current price of ABC stock is $24.25 per share. The standard deviation of the stock is σ=30% per annum, and the risk-free interest rate (continuously compounded) is rc = 3.48% per annum. No dividends for the stock are expected. The following table includes the information of the December calls and December puts for ABC stock with 42 days to expiration, which is available in an option market. Dec Calls (42 days to expiration) Dec Puts (42 days to expiration) Strike Last Bid Ask *Vol **Open Interest Last Bid Ask *Vol **Open Interest 19 5.97 5.33 5.45 10 35 0.04 0.01 0.03 460 543 20 4.78 4.72 4.75 12 234 0.06 0.02 0.05 204 6,540 21 3.46 3.31 3.37 52 435 0.13 0.10 0.12 13,923 1,432 22 2.85 2.86 2.89 19 576 0.25 0.20 0.23 332 2,987 23 1.74 1.76 1.78 153 3,894 0.52 0.49 0.51 533 10,002 24 1.15 1.10 1.13 10,798 6,456 0.90 0.83 0.88 235 1,546 25 0.70 0.71 0.77 488 3,732 1.19 1.23 1.24 33 4,093 26 0.45 0.41 0.42 1,287 4,632 2.23 2.15 2.20 15 1,092 27 0.28 0.23 0.27 502 2,934 3.09 2.98 3.04 20 201 28 0.11 0.13 0.14 12,543 2,087 3.37 3.43 3.49 40 93 29 0.04 0.06 0.10 600 2,048 5.01 4.94 5.00 4 17 30 0.02 0.03 0.08 16 1,654 5.17 5.38 5.57 2 28 * Vol is the trading volume of option contracts in a day. ** Open interest is the total number of active option contracts that are currently in the market. a) Use the Excel file of BS and Binomial Models to compute the theoretical values of these two models for the call and put assigned to you. Note that 100 is used in Binomial model calculation. (5 Marks) b) Examine whether there is any discrepancy between the theoretical values and the corresponding market prices and explain why the market prices may differ from the corresponding theoretical values. (5 Marks) c) Discuss whether the observed differences between the theoretical values and the corresponding market prices for the call and put assigned to you offer an arbitrage opportunity and why. (5 Marks) Task 2: (35 marks) Write a report that addresses the following three questions based on the call and put assigned to you. While this report does not require a standard essay structure of introduction, body, and conclusion, each student needs to follow the rules and conventions of good essay writing, including grammar and syntax, paragraphing and logical sequencing of arguments and referencing. Please note that this task is a case study for the purposes of investment strategies with the use of the stock options shown in the above table. You need to use the given information and some 3 calculations to support your arguments in your report. Please do not write in the format of questions and answers. Word count for the report: Less than 800 words, 10% above this word limit is acceptable. Any excess beyond this point will be penalised. Note that References including in-text citations and the at-end reference list are not counted in the word count. Description of Task 2: A well-known investment bank released a bullish report on ABC stock last Friday. Several investment analysts from the bank believe ABC stock shares could rally more than 60% over the next two years. The recent trading information for the last two weeks showed that the ABC stock shares had fallen in seven of ten trading sessions, giving up 6.7%. The stock is up by $1.00 today, at $24.25 per share and has added 2.1% over the last two trading days. Question 1: Comment on the trading information on the ABC stock options in terms of implementing a collar strategy for the stock. (10 Marks) Question 2: Assume that the bullish report on ABC stock is correct. Given the information on the stock from both the stock and option markets, discuss why a long collar strategy is good for long-term investors looking to acquire the stock shares. Your answer to this question should discuss the benefits of the long collar strategy based on the call and put assigned to you. You need to use the given information on the stock to support your arguments. (10 Marks) Questions 3: Discuss possible risk for the collar strategy considered in Question 2 and explain why it may be necessary to make some adjustments along the way for the long-term success of this strategy. Your answer to this question should consider a couple of scenarios for changes in the stock price to support your arguments. (10 Marks) Note that 5 marks are allocated to grammar and syntax, paragraphing, and logical sequencing of arguments. 4 The call and put assigned to each student are as follows: First Name Last Name Call Strike Put Strike Shuangyang Li 27 21 Yifeng Lou 28 20 Yutong Lu 26 22 Yanwen Mao 27 20 Danbin Ren 28 22 Ziming Song 26 20 Wei Wu 27 22 Yubin Xiao 28 21 Jiazhen Yong 26 21 Zhenxin Zhang 29 20 Shuai Zou 29 21