BU7508 - Derivatives - Accounting Assignment Help

Assignment Task

Question 1

a) With reference to the Black Scholes model, explain the concept of risk neutral valuation. Outline the Monte Carlo valuation procedures. Use the Monte Carlo method to price an option of your own choice, compare the obtained price with the market price, and discuss your results.

b) Define Value at Risk. Critically discuss the advantages and disadvantages of Value at Risk as a measure of risk. You must choose TWO companies listed on ISEQ, New York Stock Exchange, NASDAQ, London Stock Exchange, or the Exchange of the country where you come from, say Stock A and B. Download a minimum 61 days of price data of the two companies A and B ending February 2021.

(1) What is the 99%, 5-day VaR for a 1 million dollar investment in stock A?

(2) What is the 99%, 5- day VaR for a 1 million dollar investment in stock B?

(3) What is the 99%, 5-day VaR for a 1 million dollar investment in stock A and 1 million dollar investment in stock B? (4) What is the benefit of diversification for the 99% VaR?

c) On 20 April 2020, the price of one American oil futures contract plunged to be negative for the first time in history. Explain the reasons behind this and critically discuss its implications on risk management and investment.

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