Question
Task 1: Use the Monte Carlo simulation approach to estimate the VaR and CVaR of the PG call option using the following parameters (note: you
Task 1: Use the Monte Carlo simulation approach to estimate the VaR and CVaR of the PG call option using the following parameters (note: you do NOT need to estimate the VaR or CVaR of the stock):
Option strike price: 125.00 Expiration date: 25 February 2021
VaR confidence levels: 50%, 60%, 70%, 80%, 90%
VaR horizon: the remaining life of the option Volatility: implied volatility of the option
Risk free rate: current 3-month US Treasury bill yield
Expected return: assume to be zero
Dividends: assume to be zero
Task 2: Undertake one or more sensitivity analyses to explore the robustness of your results to the assumptions made.
You should write up the completed financial model in a report of no more than 2,000 words, excluding title page, tables and figures, formulas and references.
In writing up your report, you should adhere to the following guidelines:
Your report should be professionally presented. You could assume that it will be read by the senior management of the company and so it needs to be neat, properly structured and clearly and concisely written. This is an important skill in practice. You should use the following structure for your report: Title page
Executive summary: this should briefly summarise the analysis and its main findings.
Method and data: this should concisely describe your calculations and the data on which they are based
Results: this presents the results of your financial model, including the sensitivity analysis. You should provide a critical discussion of your results.
Conclusion: this should summarise the main findings of the model, critically evaluate any shortcomings of the data and method, and offer some suggestions for future work References: these should be alphabetically listed and properly formatted (see below)
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