1 Stock Options 101 Lindsay Yoshitomi Jennifer Jones Leslie White Jeff Guba 2 Intro to Stock Options Stock Option
Contracts that give you the option to buy or sell shares of a particular stock for a set price. (You are not obligated to do it!)
Call Option option allowing holder to buy stock.
-Put Option option allowing holder to sell stock.
Question to be answered What is a good value/price for your stock option on its start date March 21 2003 Our Initial Estimate 58.67 3 Key Terms Risk Free Rate- Current T-Bill rate return on safe investment. Strike Price- Pre-specified price at which the holder of a call can buy the stock or holder of put can sell stock. Length of option- the time in which one must wait to exercise a European Option in which an investor can purchase shares of particular stock. of years to download- the necessary information needed to research the price of a particular stock for a certain time period. Volatility- the amount of change in a specified stock increase or decrease. 4 Stock Option Profile Ticker Symbol JNJ Stock Johnson and Johnson Strike Price 40 Risk Free Rate 1.20 Length of Option 17 weeks of Years to Download 12 years 5 Annual Risk Free Rate -gt Weekly Rate -Since we are dealing with the option in terms of weeks we need to convert our annual risk-free rate into a weekly rate. 6 Visual Data Step 1 weekly closing prices Ratios
-This continues down the column but the last value is zero because there is nothing to divide it by. 7 Step 2 Max Min Average and Range To compute the Max Min Average Range of our ratios we used the built-in Excel functions MAX MIN and AVERAGE for the first three calculations (MAX MIN AVERAGE with the cell references). To find the Range simply subtract the minimum from the maximum. Therefore MAX 1.185596907 MIN 0.828594313 AVERAGE 1.003545923 RANGE 0.357002594 8 Graph of Weekly Closing Price Ratios 9 Normalizing Weekly Closing Price Ratios -Let be a continuous random variable representing the normalized ratios. a.) R the ratio b.) average of the ratios c.) risk-free weekly ratio 10 Bar and Line Graph of Normalized Ratios -The difference between a histogram and the bar and line graph is that the area under the graph is the probability. 11 Simulation To create a simulation the following functions were used to determine the future value of our stock option VLOOKUP I8 VLOOKUP(RANDBETWEEN(1625)A2D6264) RANDBETWEEN IF Start Price future value IF( Week 17 closing pricegt40(strike price)week 17-400) 12 Sample of Simulation Exercise 13 Therefore -We used the FV to find the value of our teams stock option on the options start date (PV). where r is the weekly annual rate t is the amount of time or weeks
14 Conclusion In conclusion after running the simulation the expected present value of our option on the start day should be approximately 18.83. This value is pretty accurate considering that we used 6000 simulations average the present values 30 times and then averaged the averages. Even looking at the further exploration changes in the risk-free rate and option length dont make a significant difference. 15 Further Exploration For some further exploration we considered the effects of the strike price the length of the option and the risk-free rate.
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