Historical Vs. Implied Volatility (Due on November 1 2020) Choose two stocks from the same industry...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Historical Vs. Implied Volatility (Due on November 1³ 2020) Choose two stocks from the same industry to minimize the influence of other confounding factors. You choose the industry that you are relatively more familiar with, and then estimate the implied volatility and historical volatility of the two stocks. The former is estimated based on their option values (refer to Ch, 13 for implied volatility). For convenience and especially if you are using my program, choose stocks with zero or low dividend yield (please specify the dividend yield in your report). Information needed here can be obtained from major financial websites such Yahoo Finance, but you can also use our Bloomberg terminal. Answer the following questions, and the discussion of each is limited to one page each question. 1) Briefly discuss the two firms of your choice, and in your discussion, you must include risk analysis and financial ratios (especially those related to risk). Which firm seems riskier? 2) Estimate the historical standard deviation for the two stocks: You need to obtain historical stock prices, either from Bloomberg or Yahoo Finance. Stock prices need to be transformed into returns. For example, You can calculate the logarithmic return In(s/s) or the arithmetic return (stock price on day T-stock price on day T-1)/ stock price on day T-1. A minimum of 30 returns is required. The standard deviation (SD) of Stock Returns can then be estimated using EXCEL function STDEV(range of return data) or the following formula: Convert the SD to annual standard deviation; if you use daily returns, the SD you obtain is a Daily one; you need to transform it to Annual SD = Daily SD (252) Describe how you got the answer. Which stock has higher historical volatility and does it make sense? 3) Implied volatility: For each of the stocks, find the market values of three call options on the stock (from sources such as Yahoo Finance): One should be near the money, and the other two in and out of the money-use options with considerable trading volume; the reason is that if an option is not heavily traded, its market price might not adequately reflect its true value or the market price is simply a stale price. You should also avoid options with just a few days to expiration, since the value of these options do not strongly depend on volatility. Use either the text's software or my program to compute the implied. volatility (be sure to enable Macro if you are using my program). Show me how you get the answer by including your inputs (S, K, r, T) and specifying the program you are using. Bloomberg terminal actually computes implied volatility too. but because we can't see the program, you are not allowed to use Bloomberg for the purpose of estimating implied volatility. Which stock has higher implied volatility and does it make sense? 4) Overall conclusion Historical Vs. Implied Volatility (Due on November 1³ 2020) Choose two stocks from the same industry to minimize the influence of other confounding factors. You choose the industry that you are relatively more familiar with, and then estimate the implied volatility and historical volatility of the two stocks. The former is estimated based on their option values (refer to Ch, 13 for implied volatility). For convenience and especially if you are using my program, choose stocks with zero or low dividend yield (please specify the dividend yield in your report). Information needed here can be obtained from major financial websites such Yahoo Finance, but you can also use our Bloomberg terminal. Answer the following questions, and the discussion of each is limited to one page each question. 1) Briefly discuss the two firms of your choice, and in your discussion, you must include risk analysis and financial ratios (especially those related to risk). Which firm seems riskier? 2) Estimate the historical standard deviation for the two stocks: You need to obtain historical stock prices, either from Bloomberg or Yahoo Finance. Stock prices need to be transformed into returns. For example, You can calculate the logarithmic return In(s/s) or the arithmetic return (stock price on day T-stock price on day T-1)/ stock price on day T-1. A minimum of 30 returns is required. The standard deviation (SD) of Stock Returns can then be estimated using EXCEL function STDEV(range of return data) or the following formula: Convert the SD to annual standard deviation; if you use daily returns, the SD you obtain is a Daily one; you need to transform it to Annual SD = Daily SD (252) Describe how you got the answer. Which stock has higher historical volatility and does it make sense? 3) Implied volatility: For each of the stocks, find the market values of three call options on the stock (from sources such as Yahoo Finance): One should be near the money, and the other two in and out of the money-use options with considerable trading volume; the reason is that if an option is not heavily traded, its market price might not adequately reflect its true value or the market price is simply a stale price. You should also avoid options with just a few days to expiration, since the value of these options do not strongly depend on volatility. Use either the text's software or my program to compute the implied. volatility (be sure to enable Macro if you are using my program). Show me how you get the answer by including your inputs (S, K, r, T) and specifying the program you are using. Bloomberg terminal actually computes implied volatility too. but because we can't see the program, you are not allowed to use Bloomberg for the purpose of estimating implied volatility. Which stock has higher implied volatility and does it make sense? 4) Overall conclusion
Expert Answer:
Answer rating: 100% (QA)
Firm Choice For this exercise I have chosen two firms from the Retail industry The Home Depot Inc HD and Lowes Companies Inc LOW Retail industry as a whole is generally subject to higher volatility du... View the full answer
Related Book For
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon
Posted Date:
Students also viewed these accounting questions
-
The price/earnings ratios of four companies from the same industry are: Company ....... P/E Ratio Fresh Market ....... 49 Kroger ......... 23 Safeway ........ 9 Whole Foods Market .... 41 Required:...
-
The price/earnings ratios of four companies from the same industry are: Company P/E Ratio Fresh Market....................................16.3 Kroger............................................19.7...
-
Briefly discuss the major factors that may influence the choice of an individuals leadership style. Correlate these factors with different leadership styles.
-
Selected data from a February payroll register for Halverson Company are presented below. Some amounts are intentionally omitted. FICA taxes are 7.65%. State income taxes are 4% of gross earnings....
-
How would the sales and profit performance over a 3-year period differ between a business with only defensive strategic market plans and a business with only offensive strategic market plans? Why is...
-
A mass spectrometer is being used to separate common oxygen-16 from the much rarer oxygen-18, taken from a sample of old glacial ice. (The relative abundance of these oxygen isotopes is related to...
-
The Football Bowl Subdivision (FBS) level of the National Collegiate Athletic Association (NCAA) consists of over 100 schools. Most of these schools belong to one of several conferences, or...
-
Your client, Summerford, Inc., has a debt agreement with Valley City Bank that includes a number of restrictions and covenants. Violation of any restriction or covenant results in the entire amount...
-
Charge q 1 = 7 nC is located at the coordinate system origin, while charge q 2 = 0 . 5 5 nC is located at ( a , 0 ) , where a = 0 . 7 5 m . The point P has coordinates ( a , b ) , where b = 0 . 2 5 m...
-
It took a long time but the Securities and Exchange Commission finally acted and held auditors responsible for the fraud that occurred in banks during the financial recession. Surprisingly to some,...
-
how to find the depreciation of an object and the amount it goes down each year
-
7. Clean your plate and create a "wet sand beach" with some open water. Pour some of your simulated "crude oil" onto the surface of the beach. What happens to the oil? 8. Using fingers or tweezers,...
-
use this initial code to complete java code Skyscraper.java import java.io.FileNotFoundException;/** * Reads in configurations of potential solutions to Skyscraper puzzles and * evaluates their...
-
suppose that the consumer side of the market for skateboards in new york is represented by the diagram below. The current price of skateboards is PA. Each of the events described below will have some...
-
Calculate the percentage price change for 4 bonds with different annual coupon rates (5% and 10%) and different maturities (3 years and 10 years), starting with a common 7.5% YTM (with annual...
-
The blocks are connected with each through an underground tunnel. The distance between blocks is 320 meters. Each block has its own server room for housing servers and network devices. Each floor has...
-
Using the equation for the distance between fringes, Ay X, complete the following. Screen Ay = x y 0 (a) Calculate the distance (in cm) between fringes for 416 nm light falling on double slits...
-
When the concentration of a strong acid is not substantially higher than 1.0 10-7 M, the ionization of water must be taken into account in the calculation of the solution's pH. (a) Derive an...
-
Bravo Wholesalers, Inc., began its business on January 1, 2014. Information on its inventory purchases and sales during 2014 follows: Assume a tax rate of 40%. Required: 1. Compute the cost of ending...
-
Maple Corporation sells farm machinery on the installment plan. On July 1, 2014, it entered into an installment sale contract with Agriculture, Inc., for an eight-year period. Equal annual payments...
-
Refer to the 2012 General Electric Retiree Health and Life Benefits disclosure appearing in Exhibit 14.6. Required: 1. Reconstruct the journal entries that GE would have made in 2012 to record the...
-
The balance sheet of Dot Co. for the year ended 31 December 20X2, together with comparative figures for the previous year, is shown in Figure 13.7 (all figures :000). You are informed that there were...
-
Under IFRS, a group is a set of entities that the parent: A. Significantly influences. B. Owns a majority of the voting power in. C. Jointly controls. D. Controls.
-
Under IFRS 10, control over an entity means: A. Power to govern its financial and operating policies. B. The right to appoint the majority of its Board members. C. Power to affect the variable...
Study smarter with the SolutionInn App