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instruction for project_spring11

instruction for project_spring11 - SECOND CITY OPTIONS CASE...

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SECOND CITY OPTIONS CASE Derivative Security Markets Instructions: In this case analysis, you will need to be able to calculate the Black-Scholes model, the historical volatility, implied volatilities, and analyze option strategies. The Black-Scholes model can be calculated using the Excel spreadsheet BSMbin8e.xls. The historical volatility can be calculated using the Excel spreadsheet hisv7e.xls. Alternatively, you can calculate the volatility directly from Excel. The option strategies can be analyzed using the Excel spreadsheet stratlyz7e.xls or you can create your own spreadsheet and graph. In preparing your analysis, you are to assume the role of Carla Shilling and provide the information as requested in bold. For each new part of this case (as indicated by a Roman numeral), label your answer with Roman numerals that correspond to these instructions. Your written analyses should be prepared using a word-processing package and copy the relevant results from excel to the word file. You should print the word file out. You should strive to be as efficient as possible in your writing (short in length but cover pertinent details). Due Date: The last class of the semester in the classroom. This project is group work. The groups are the same as the Stocktrak Groups, unless special arrangements have been made. Disclaimer: This class does not suggest that the technical trading strategies used by the mock-firm are a valid technique for profitable trading. Remember, if markets are efficient then such trading should not yield abnormal profits for the risk that is taken (abnormal risk-adjusted profits). Rather the point of the exercise is for you to analyze options and think about trading strategies for a particular market forecast. Further, the project illustrates that options can be used to match future payoffs to very specific forecasts (rather than simply bullish or bearish). This project also illustrates the use of the Black-Scholes option pricing model, implied volatility, and the importance of the volatility estimate in pricing options. The option prices and market scenario in this case should be regarded as hypothetical. Acknowledgements and Thanks: This case was modified from a case provided by Don M.
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