AFIN3028 - Financial Risk Management - Accounting and Finance Assignment Help

Assignment Task

This is an individual assignment with 100% of the marks allocated to individual performance. The assignment requires each student to submit an Excel spreadsheet that contains all necessary computations and explanations. You should use the template provided; each task should be performed on a separate worksheet; you may create more worksheets if necessary.

a. Assume the stock price follows a geometric Brownian motion, simulate two trajectories of daily prices for the next year (assume 252 trading days per year). One of the price trajectories should have ST > S0, and the other should have ST < S0 at maturity. Plot the two price trajectories together in a graph. Label x-axis as t (number of years) and y-axis as St (stock price at time t).

b. Suppose the option is a call option. For each of the price trajectories simulated in Part (a), perform a dynamic delta-hedging strategy similar to that in Table 8.2 of the textbook. Compute the profit/loss of the FI for each price trajectory.

c. Suppose the option is a put option. Repeat the exercise in Part (b).

d. Does the profit/loss in Part (b) and Part (c) depend on the difference between the two price trajectories? Why or why not?

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