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FIN 551 Course Project - Excel Applications - Part 2

The document outlines a course project for FIN 551 Derivatives, focusing on creating an option strategy for Tesla's stock and analyzing its payoff structure. It includes tasks such as calculating the strategy's cost using a binomial tree, drawing profit diagrams, and determining breakeven prices. Additionally, it presents a bonus section on writing options for Amazon stock while anticipating price movements.

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Osama Rashad
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15 views2 pages

FIN 551 Course Project - Excel Applications - Part 2

The document outlines a course project for FIN 551 Derivatives, focusing on creating an option strategy for Tesla's stock and analyzing its payoff structure. It includes tasks such as calculating the strategy's cost using a binomial tree, drawing profit diagrams, and determining breakeven prices. Additionally, it presents a bonus section on writing options for Amazon stock while anticipating price movements.

Uploaded by

Osama Rashad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FIN 551 Derivatives

Course Project

Part 2: Excel Applications


Section 1
A client came to you asking for your advice to create an option strategy that will provide the payoff
structure using certain options on Tesla’s stock. The options should expire in 1 month. The payoff structure
and the required type of options will be determined for each group separately and is available on LMS in
the “FIN 511 Course Project” folder.

Your task is to create a strategy that meets the client’s needs using a combination of the options as
specified in the payoff structure file for your group.

i) Explain how your client can create the required strategy using options (i.e., what is the mix of
options you need for this strategy).
ii) Using a five-step binomial tree approach and showing the inputs you used in your calculation,
calculate this strategy’s cost (or net premium received). Assume the rf is 5.5% with quarterly
compounding. Refer to the CME to obtain Tesla’s implied volatility.
iii) Draw the payoff and profit (loss) diagram.
iv) Based on the prices you calculated for the options, at what price (or prices) of the underlying
stock will the strategy breakeven?
v) What assumptions did the client make that motivates the creation of this strategy?

Section 2 (Bonus) [10% of the project mark]


You own 100 stocks of Amazon’s stock. The current stock price is $3,120. You believe that the
stock price will double in two years, but you have a strong feeling that the stock price will drop in the next
six months due to the current economic conditions, you are not worried about this drop because you believe
it is temporary. Therefore, based on your expectations, you want to benefit from the stock price movement
by writing options without giving up your stock. The options available in the CBOE are as follows:

Option Type Strike Price Maturity


Call $3,080 3 Months
Call $3,100 3 Months
Call $3,120 3 Months
Put $3,080 3 Months
Put $3,100 3 Months
Put $3,120 3 Months
i) What is the name of the strategy you will create that includes both the stocks you own and the
options you will write? Which option will you choose and why?

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ii) The price of a call option on Amazon’s stock that expires in 9 months with a strike price of
$3,080 is $400. If the 9-month Treasury bill is 1.315% (APR rate), what is the implied
volatility?
iii) Using the implied volatility in the previous question, and based on the Black-Scholes-Merton
model, what is the expected revenue from the strategy you chose in part (i)?

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