FIN 5216 Computational Finance Professor Feng
Sample Final Exam
1. You observe two call options on the same stock that appear to be relatively mispriced. Call ABC sells for
$3.50, has a strike price of X = 50, and an implied volatility from the Black-Scholes model of 30%. Call
XYZ sells for $.75, has a strike price of X = 60, and an implied volatility of 25%. You wish to create a
delta-neutral position on these options that will exploit the apparent inconsistency in implied volatilities.
a. Suppose you believe that the Black-Scholes model is the correct model for valuing options.
Which option will you buy? Which will you sell?
b. If you buy and sell equal numbers of the two options, will your portfolio be delta neutral? If
not, which option will require a bigger position (i.e., a purchase or sale of a greater number
of contracts) to establish a delta-neutral portfolio?
2. A Monte Carlo model assumes that the portfolio return over short periods is approximately
normally distributed, with an 8% annual mean rate of return, and annual standard deviation of
30%. The initial value of the portfolio is $1 million. When simulating possible stock price
paths, the first draw from standard normal random variable function gives a value of Z = 1.2. If
the length of the time period in your model is one month, then what is the assumed value of the
portfolio at the end of that first month?
3. The following matlab program is a function named AsianMC.m. It is trying to calculate the
price of an Asian call option on the arithmetic average stock price. Please complete the code as
below:
% S0 initial stock price
% K stike price
% r risk free rate
% T time to maturity
% Sigma volatile of underlying stock
% NPairs number of pair path
function [P,CI] = AsianMC(S0,K,r,T,sigma,NSamples,NRepl)
Payoff = zeros(NRepl,1);
for i=1:NRepl
Path=AssetPaths(S0,r,sigma,T,NSamples,1);
Payoff(i) = ____Fill in Answer____________;
end
[P,aux,CI] = normfit( exp(-r*T) * Payoff);
4. You have your wealth invested in a portfolio of three assets: a stock market index,
a risky corporate bond index, and a real estate index. These assets are expected to perform
differently depending on the economic environment.
Assume there are only two possible outcomes, a good and bad economy. The good economic
outcome occurs with probability 0.75.
(a) Calculate the expected return and standard deviation of your portfolio.
(b) Now, suppose you borrow an additional $15,000 by shorting the corporate bond index
and adding it to your original wealth, which you invest proportionally in your portfolio.
Calculate the expected return and standard deviation of your new portfolio.
5. In this problem, you will need the following table of N(d) to provide inputs for a Black-
Scholes analysis. For values of d1 and d2 that do not correspond exactly to values in the
table, simply round off d1 or d2 to the nearest entry on the table. Also, use the
approximation that when X and S are close, ln(S/X) equals the percentage difference
between S and X, expressed as a decimal. For example, ln(97/100) = ln(.97) –.03.
A firm offers portfolio insurance on a $10 million portfolio indexed to the S&P 500, with a 4-
year horizon, and with a target guarantee of zero losses. The risk-free rate is 3%, and the firm
believes market volatility is = 30%. The product is provided on an overlay basis: in other
words, the portfolio is fully invested in stock and the firm sells stocks to reduce overall delta to
the appropriate level.
How many shares S&P 500 should the firm sell today if the Index currently is at 1000. Assume
that one may sell fractional quantities of the shares.
d N(d) d N(d)
0 0.500 0.55 0.709
0.05 0.520 0.60 0.726
0.10 0.540 0.65 0.742
0.15 0.560 0.70 0.758
0.20 0.579 0.75 0.773
0.25 0.599 0.80 0.788
0.30 0.618 0.85 0.802
0.35 0.637 0.90 0.816
0.40 0.655 0.95 0.829
0.45 0.674 1.00 0.841
0.50 0.691 1.05 0.853
Q6. AQR and DFA Case
Q 7-8 will be similar to midterm sample exam.