Fin 421 Case
Case II
FNAN 421
Executive Summary The following case provides an analysis of six publicly traded stocks for the purpose of determining which amongst them would be prime candidates for a portfolio in terms of optimal return. Specifically, this paper discusses what options should be written or bought and exercised on the qualifying stocks to maximize profits. In order to accomplish this task the stocks will be measured and compared based on their market performance in terms of returns, betas and volatility, using historical data (recorded stock prices) and regression analysis. Initially the stocks are analyzed using historical returns to derive expected returns and standard deviations, or deviations from the mean or average market return. …show more content…
Call and put options were calculated for the second year efficient portfolio of stocks which included Sony, Google, Exxon-Mobil, and Apple. As a definition, call options allow the purchaser the right, but not the obligation, to buy a security, bond, or other instrument, at a pre-specified exercise or strike price for a predetermined period of time, at a cost known as a call premium. A put option on the other hand gives the purchaser the right, but not the obligation, to sell a stock, bond or commodity, at an agreed upon price over a fixed period of time in return for a premium. One crucial element of options is that they hold value over a limited and fixed period of time. Moreover, this value increases as time to expiration increases. In the analysis of the stocks chosen, theoretical call and put prices were derived using software for options calculations. Specifically the binomial option pricing or “tree method” was calculated using the following parameters: 1) the stock price, 2) exercise price 3) historical standard deviations, 4) the relevant interest rates and 5) times to expiration. The two time horizons were five and nine weeks, ending the third week of December 2007 and January 2008. For these two different time periods the interest rate used was based on the one month and three month libor, with a rate of 4.65% for the December calculations and a rate of 4.87% for January calculations. These prices were then compared to actual call and put option prices maturing in the third week of December 2007 and January 2008, for three different strike prices; strike price closest to stock price, strike price above, and strike price below. As an example, the current stock price for Sony® as of November 19th, 2007
FNAN 421
Executive Summary The following case provides an analysis of six publicly traded stocks for the purpose of determining which amongst them would be prime candidates for a portfolio in terms of optimal return. Specifically, this paper discusses what options should be written or bought and exercised on the qualifying stocks to maximize profits. In order to accomplish this task the stocks will be measured and compared based on their market performance in terms of returns, betas and volatility, using historical data (recorded stock prices) and regression analysis. Initially the stocks are analyzed using historical returns to derive expected returns and standard deviations, or deviations from the mean or average market return. …show more content…
Call and put options were calculated for the second year efficient portfolio of stocks which included Sony, Google, Exxon-Mobil, and Apple. As a definition, call options allow the purchaser the right, but not the obligation, to buy a security, bond, or other instrument, at a pre-specified exercise or strike price for a predetermined period of time, at a cost known as a call premium. A put option on the other hand gives the purchaser the right, but not the obligation, to sell a stock, bond or commodity, at an agreed upon price over a fixed period of time in return for a premium. One crucial element of options is that they hold value over a limited and fixed period of time. Moreover, this value increases as time to expiration increases. In the analysis of the stocks chosen, theoretical call and put prices were derived using software for options calculations. Specifically the binomial option pricing or “tree method” was calculated using the following parameters: 1) the stock price, 2) exercise price 3) historical standard deviations, 4) the relevant interest rates and 5) times to expiration. The two time horizons were five and nine weeks, ending the third week of December 2007 and January 2008. For these two different time periods the interest rate used was based on the one month and three month libor, with a rate of 4.65% for the December calculations and a rate of 4.87% for January calculations. These prices were then compared to actual call and put option prices maturing in the third week of December 2007 and January 2008, for three different strike prices; strike price closest to stock price, strike price above, and strike price below. As an example, the current stock price for Sony® as of November 19th, 2007