State and comment on all the main assumptions underlying

Question

Task 1

(a) Use Bloomberg to estimate the prices and the Greeks of the following stock indexoptionsStrikes 5,800 5,500 5,400Call-3monthsPut-6monthsNote that these are FTSE-100 Index Options and the value of the index today isassumed to be 5,700. The options should be priced within the Black & Scholesframework using the following inputs: rate of interest 1.00%p.a., dividend yield 0.00%,and volatility 6.00% p.a.State clearly each necessary step requested to compute the price and the Greeks of theoptions above.

(b) Write a short report with a critical summary of the results.

Task 2

Consider the Single Index Model (SIM).

(a) State and comment on all the main assumptions underlying the SIM.(b) Use Bloomberg to collect data on 4 stocks. Assume that you invest an equal amount ofyour wealth on each stock and build up a portfolio.

Estimate:

(i) The beta of your portfolio; comment your empirical results.

(ii) The market risk and non-market risk; comment on your results.

(iii) The covariace matrix; comment on your resultsState all your assumptions and computations.

Answer 1

By using the basics of Portfolio management and by considering the case situation and information provided; respond to the following questions. 1) Make use of Bloomberg to approximate the prices and the Greeks of the given stock indexoptions Strikes 5,800 5,500 5,400 Call-3months Put-6months. Note that these are FTSE-100 Index Options and the value of the index today is supposed to be 5,700. The options must be priced in the Black and Scholes framework by employing the given inputs: rate of interest 1.00% p.a., dividend yield 0.00% and volatility 6.00% per annum. State clearly each essential step requested to calculate the price and the Greeks of the options above. 2) Prepare a short report by means of a critical summary of the outcomes.