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Econ 136 HW 4 and 5 Calculating Strike Price Probabilties
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Video instructions: Homework 4 and 5 & supplemental information Econ 136 Spring 2012 © 2012, Gary R. Evans. This material may not be used without written permission of the author. Red Car Oct 2011 (28).JPG Advice: Look at the slides without sound first. When using the video, pause and look at the slide referred to in the narration. Give any feedback to Prof E. Tools and objectives ... Files: NormBase: An Excel workbook that shows how to map normal distributions and their log transformations. There is no HW associated with this, but it is useful to peruse and the structure and commands might come in handy. HNJNK: Used in HW 4, this Excel workbook is one of my master files used to get quick daily volatility and historical alpha estimates while also allowing to test distributions for normality. This has 252 observations that you will over-ride without otherwise altering the workbook (unless you want to). SPPC (Strike Price Probability Calculator): Using the volatility estimates from HW4, this Excel workbook is used in HW5 to calculate the probability of a stock price settling on the other side of an option strike price upon maturity. This is an empty interface. You must used the lectures and possibly material from NormBase to figure out how to do this. We transform When you ask the question, “What is the prob that price will go from 100 to 105?”, you are also asking “How many standard deviations is 105 away from 100, and what is the probability of that?” The NormBase file ... Homework 4 Using my volatility master to get good volatility estimates for JNK You can download my completed historical volatility master which is plug and play once you have the data. It is loaded with old data for JNK and I want you to update the data just like I do when I use it. It takes about 5 to 10 minutes. So go get 252 current observations for JNK. I calculate daily volatility (SD) for one year, 60 day and 30 day. I also calculate: Average absolute value of CGR (another useful context-based volatility estimator). Min and Max daily CGR in the period in question. Normalized extremes to standard deviation interpret the -5.50033 value to indicate that on one day there was a negative 5.5 sigma move to the downside (which has to be interpreted as anomalous with a sample size of only 252. Note how I index that data on the left that speeds things up for me. I offer this as a courtesy. I am not going to explain this to you it is beyond the scope of this class, but you can likely figure it out on your own if you care to see how this is done. The structure on the left allows the two mappings below (visual check of normalcy. Another courtesy and I definitely will not try to explain this. You can figure this out on your own by researching it. If you have access to and understand and can use Matlab (and probably Mathematica) then their built-in tutorials for using this and other normalcy tests are excellent. These tests are also much easier to build in Matlab than Excel. The good test here has fails all the way down. I offer this as a courtesy. I am not going to explain this to you it is beyond the scope of this class, but you can likely figure it out on your own if you care to see how this is done. The structure on the left allows the two mappings below (visual check of normalcy. Another courtesy and I definitely will not try to explain this. You can figure this out on your own by researching it. If you have access to and understand and can use Matlab (and probably Mathematica) then their built-in tutorials for using this and other normalcy tests are excellent. These tests are also much easier to build in Matlab than Excel. The good test here has fails all the way down. Homework 5 - Calculating the probability of hitting a strike price Drawing upon data from HM4, we now ask and answer the following question Given today’s stock price (39.530), what is the probability that the price of this stock will be below the strike price of a 39 put on the day that the option expires (in 40 days in this example)? A simple version of this assumes the alpha is zero, a more complicated version assumes the alpha is the Mean CDGR. The daily volatility is adjusted for duration volatility by multiplying SD by the square root of the number of days to expiration. This interface is designed as a learning interface taking you through a sequence of steps.