Monte Carlo Simulation

You own 50,000 shares in XYZ Corporation. The current price of XYZ is S0 = $35 and the stock price is lognormally distributed with mean = 25% and standard deviation = 50%. The ABC Bank has agreed to give you a loan of $2,000,000. The loan conditions are: Loan term: 10 years. The loan is a bullet loan, meaning that there is no payment of interest or principal until year 10. Loan interest: 8%. In year 10 you will owe ABC Bank $2,000,000(1.08)10. The loan is secured by your stock holding. This means that if the nal payment on the loan is more than the value in year 10 of the shares, the bank will get all the shares.

1. Simulate one path of the stock price and compute the rate of return on the loan to the bank.

2. Run 100 simulations using data table on blank cell to compute ABC Banks expected rate of return and the standard deviation of this return.