Risk management

Objective The objective of the project is to train you creating financial derivative for hedging purposes. You will use real data of stocks listed on a regular exchange to create forwards and options. Forwards Download one-year daily data of the closing prices of any two stocks (you may continue with the stocks you used in VaR assignment). In addition, download three-month and six-month LIBOR for the corresponding period. Create one six-month and two three-month forward contracts for each stock. Options You will design six-month and three-month options over the periods corresponding to the periods of your forward contracts. Create two six-month options (one call and one put) and four three-month options (two call and two put) for each stock. Use the prices of the corresponding forwards as exercise prices. Requirements 1. Determine the price of each forward contract. Use the spot price of underlying at the time of expiry of forward contract to compute payoff for the long in each contract. 2. Determine the call and put prices (premium) for each option contract. Use the price of underlying stock at the maturity of the option to determine payoff and profit for the long in each option contract.                                                                                                

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