Would anyone be able to help me with the following:
The task you are given is to hedge the market risk over one month for a hypothetical holding of 10,000 ANZ shares (ANZ.ax), held as of the close of trading on February 1, 2018. You will consider doing this using several option hedging strategies of varying levels of complexity, evaluating the cost of implementation using an appropriate option pricing model. To aid your analysis, you will require historical data on ANZ prices which can be obtained from Yahoo finance with the above ticker code.
You will consider hedging some of your downside risk using three option hedges discussed below. In each case, you will determine the cost of each of the options using a six step binomial model that you implement in excel. All option contracts are to expire in one month and meet basic ASX characteristics (i.e. - they should be American options over 100 shares each). Your volatility input into the model should be obtained from an EWMA estimate based on five years of historical data. You can assume a risk free rate of 1.8% p.a. without the need to source additional data. The option strategies to be considered are as follows;
1. A married put strategy.
Here, you will attempt to buy as much downside protection as possible given a risk management budget of $1000. This means that you will find put option contracts with the most favourable strike price such that you have enough options to cover all of your shares and don't spend more than $1000. Again, the price of the options is to be determined from your binomial option pricing model.
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