2. Estimate the volatility of Citigroup. a. Calculate the daily returns (St + 190/ 511 of Citigroup (le BigGameCitigroupData.cvs). b. Use the excel function STDEV to estimate the volatility of the daily returns within the last year (Jan 26, 2007 to Jan 25, 2008). Multiply the daily volatility by the square root of 252 (number of trading days per year) to get the annualized volatility. Further, estimate the annualized volatility within the last 6 months (July 26, 2007 to Jan 25 , 2008). c. Construct the volatility surface using the options in Exhibit 3. Assume the dividend yield for options with 1 year to maturity is 3.6% and for options with 2 years to maturity 2.6%. Use the Excel Option Pricing Tool om our class. Use the excel Solver Add-in to nd a volatility (cell C6) such that the option prices in Exhibit 3 match the American option prices in cells R17 and R18 in a Binomial tree with n = 250 steps. How do the option implied volatilities compare to the volatility estimated om the past 1 year or 6 months of daily data? (1. Estimate the volatility of daily returns from Jan 28, 2008 to Jan 1, 2011. How does this volatility compare to the estimates in questions (b) and (c)? 3. Calculate the price of the rst Citigroup trade in Exhibit 5. a. Use a Binomial tree with 3 steps (1 step = 1 year). Assume cash dividends of $0.18 are paid at the end of the rst and second year. Suppose the annualized volatility is 39.2%. b. Use the Black-Scholes model with a volatility of 39.2% and a dividend yield of 2.6%. 4. What could be the potential reasons why your estimated values in 3.a and 3b differ from the $100 millions paid by the LIA? 5. Why did the LIA enter these elephant trades? What might be the LIA's motivation to enter a trade specically on Citigroup's stock? Was the trade a mistake? 6. What might be Goldman's motivation for organizing the elephant trades? How do they set the price/premium? 7. If Goldman would like to hedge its risk exposure implied bv the trade. how could theV