| University | Singapore University of Social Science (SUSS) |
| Subject | Financial Modelling |
Financial Modelling Assignment
The original task is summarized as follows:
you are an analyst in an investment bank and you are analyzing the risk of an investment in options on Procter and Gamble stock (ticker symbol PG).
You should compute the VaR at a variety of confidence levels for a position in a call option on PG stock with a maturity that is as close as possible to three months, and for a strike price that is about 90% of the current stock price. The VaR horizon is the maturity of the option.
You should also estimate the corresponding VaR for a position in the underlying stock. You should incorporate in the simulation the expected return of the stock and any dividends that it pays.
Requirements of the Assignment
For this assignment, you should undertake the following tasks:
Use the Monte Carlo simulation approach to estimate the VaR and CVaR of the PG call option using the following parameters (note: you do NOT need to estimate the VaR or CVaR of the stock):
- Option strike price: 125.00
- Expiration date: 25 February 2021
- VaR confidence levels: 50%, 60%, 70%, 80%, 90%
- VaR horizon: the remaining life of the option
- Volatility: implied volatility of the option
- Risk-free rate: current 3-month US Treasury bill yield
- Expected return: assume to be zero
- Dividends: assume to be zero
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