Answer Happy

A Financial Institution has written 20 European Call Options on one stock and 45 European Put Options on another stock in order to produce income. For the Call Option; the current underlying stock price is $33.50, the strike price is $37, the volatility is 28% per annum, and the time to maturity is four months. For the Put Option; the current underlying stock price is $18.25, the strike price is $15, the volatility is 19% per annum, and the time to maturity is ten months. Neither stock is expected to pay a dividend, and the risk-free rate is 2.5% per annum. The correlation between stock price returns is 53%. Calculate a 3-day 99% VAR;

HINT: You will need to simulate 2 sets of random daily returns, one for each stock. For the second stock, you will need to factor in the correlation of 0.53. To simulate correlated normal random variables; First simulate 2 sets of independent standard normal variables, with a mean 0 and standard deviation of 1. The daily return of the first stock can be found via; dSx = mean(x) + stdev(x) x 21 The daily return of the second stock can be found via; dS, = mean(y)+ stdev(y) x (22+z2V 1 – p?] As per normal practice, use zero for the mean daily returns.