Econ 136 HW 4 and 5 Calculating Strike Price Probabilties
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Slide 1
Tools and objectives ...
Slide 3
Slide 4
Slide 5
Slide 6
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Slide 6
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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.