It’s important that sales forecasts be made

A bank has written a call option on one stock and a put option on another stock. For the first option the stock price is 50, the

iris [78.8K]

Answer:

10-Day 99% VaR = 3.61

Explanation:

Data Given:

For First Option:

Stock Price = 50

Strike Price = 51

Volatility = 28% per annum

Time to maturity = 9 months

For Second Option:

Stock Price = 20

Strike Price = 19

Volatility = 25% per annum

Time to maturity = 12 months or 1 year

Risk Free Rate = 6% per annum

Correlation = 0.4

Find 10-day 99% VaR.

Solution:

First of all we need to refer the DerivaGem Model to dig out the change in price equation for both the options.

So, according to DerivaGem Model, We have following data:

For First Option:

Value = -5.413

Delta Value = -0.589

For Second Option:

Value = -1.014

Delta = -0.284

Change in Price = (Delta value of First Option x Stock Price)Y1 + (Delta value of the second option x Stock Price)Y2

Change in Price = (-0.589 x 50)Y1 + (-0.284 x 20)Y2

So, We will get the Change in Price Linear Equation for both the options.

Change in Price = -29.45Y1 -5.68Y2

Now, we have to calculate the Daily Volatility Percentage.

Formula:

Daily Volatility Percentage = Volatility/ Square root of number of days active in annum

Number of Days Active = 252

Volatility for First Option = 28%

Volatility for Second Option = 25%

Daily Volatility Percentage for First Option = 28%/ $\sqrt{252}$

Daily Volatility Percentage for First Option = 0.0176

Similarly,

Daily Volatility Percentage for Second Option = 25%/ $\sqrt{252}$

Daily Volatility Percentage for Second Option = 0.0157

Now, utilizing the above calculated data, we can find the one-day variance of change in price.

1-Day Variance = $(29.45^{2} *0.0176^{2}) + (5.68^{2} * 0.0157^{2}) - (2 * 29.45 * 0.0176 * 5.68 * 0.0157 * 0.4)$

Solving the above equation:

We get:

1-Day Variance = 0.2396

Now, we have to find the standard deviation of 1-Day Variance:

SD of 1-Day Variance = $\sqrt{0.2396}$

SD of 1-Day Variance = 0.4895

So,

Now, in order to find the value of one day 99% VaR from the table, we have all the prerequisites.

So,

Value of One day 99% VaR from table = 2.33

But we need 10-Day 99% VaR.

So, number of days = 10

Hence,

10-Day 99% VaR = $0.4895 * 2.33 * \sqrt{10}$

10-Day 99% VaR = 3.61

8 0

3 years ago

U.S.-based royal corporation is hesitant about entering into a licensing agreement with hexagon, inc., a company from the monasl

sasho [114]

I guess the correct answer is legal

U.S.-based Royal Corporation is hesitant about entering into a licensing agreement with Hexagon, Inc., a company from the Monaslu Republic, due to the likelihood that Hexagon will opportunistically break a contract or expropriate property rights. The type of risk Royal Corporation trying to avoid is legal.

Lеgal risk is thе risk οf financial οr rеputatiοnal lοss that can rеsult frοm lack οf awarеnеss οr misundеrstanding οf, ambiguity in, οr rеcklеss indiffеrеncе tο, thе way law and rеgulatiοn apply tο yοur businеss, its rеlatiοnships, prοcеssеs, prοducts and sеrvicеs.

8 0

3 years ago

How much would you have to invest today in the bank at an interest rate of 10% to have an annuity of $5600 per year for 7 years,

Shtirlitz [24]

Answer:

PV = $27,263.15

It will be needed to deposit the lump sum of $27,263.15

Explanation:

The question is asking for how much will you need to deposit in a lump sum today to withdraw for seven years the sum of $5,600 with an interest rate of 10%

In other words it is asking us for the preset value of an annuity of $5,600 with interest of 10%

Using the present value of an annuity formula of $1 we can solve for the present value of that annuity, which is the amount needed to generate this annuity

$C * \frac{1-(1+r)^{-time} }{rate}= PV\\$

We post our knows value and solve it:

$5,600 * \frac{1-(1+0.10)^{-7} }{0.10}= PV\\$

PV = $27,263.15

8 0

3 years ago

At what stage of growth is a business profitable, with enough money to reinvest into the company? A. Successful B. Start-up C. M

Trava [24]

D. Stability, is right.

6 0

3 years ago

Read 2 more answers

Flexible budgets and variance analysis are very useful tools for managers, but are sometimes difficult to understand. Find an on

Anettt [7]

Answer:

Flexible budgets: These type of budgets are assessments, which may vary with the capacity or production for a given period.

Say for model there might be two type of budgets which bend with two or three situations of fabrication volume or production. The situations might be:

1. Budget when fabrication is at highest volume, the revenue and expenditures at the utmost output.

2. Budget when there is prime capacity, the revenue and expenditures valued at the optimal application of resources to produce optimal productivity or satisfactory output.

3. Budget when there is low capacity or demand is nearly nil, the revenues and expenditures that will be valued.

This flexible budget guides administration to appropriately plan their resources and flex with the capacity whenever it’s required subject the change in situations.

Variance Analysis: The investigation of deviance of several cost restriction with the usual set in at the start of the year results in Variance Analysis. There are several types of modifications which needs analysis and these will be diverse with the business type. The below are few common instances of modifications.

Sales capacity variances, sales combination variances, Material value variances, labor proportion variances, machine dependent price variances, overheads expenditure variances, Material procedure, Material Amount, Material replacement, labor and engine time variances etc.

These will help the administration to comprehend practically how precise the values set in for a given period of time.

5 0

3 years ago