COURSEWORK SOLUTION Harvard Case Solution & Analysis

COURSEWORK  Case Solution

Part a)

            The stock option prices and Greeks for each option have been computed on Bloomberg. The models are also shown in the excel spreadsheet, which give us the same value of the options and the option Greeks. The following steps have been followed on Bloomberg to compute these prices:

  • First of all we typed ‘option’ in the navigation menu, which took us to the option menu;
  • Next, we clicked on OVML, which took us to the option valuation model and from there, we chose the option calculator based on Black and Scholes Framework;
  • After this, all the required inputs were entered into the models, which are spot reference, volatility, given strike prices and tenure;
  • The call and put prices along with their Greeks had been computed after that.

The Bloomberg option calculator looks like this:

Part b): Short Report

            All the computed option prices along with their Greeks are shown in the excel spreadsheet. The prices have been again computed using the same Black-Scholes framework and it gave us the same results. If we look at the results of the call option prices and its Greeks, then for a 3 month call, the option price is $ 34.26. This is the current cost of this 3 month call option for an exercise price of $ 5800. When the market would move up or down by 1 point, then the theoretical price of the option would change by 0.3151, which is given by the delta of this option. When the market would move up or down by 1 point, then the delta would change by 0.0021, which is given by gamma of the call option.

The change in the theoretical price of this call option would decline by -0.3812, if 1 day passes. This is given by Theta of the option. If the volatility of the asset goes up or down by 1 percentage point, then the theoretical price would change by 10.12, which is shown by Vega of this call option. Finally, if the interest rates move up or down by 1 percentage point, then the theoretical price of call option would change by 4.40, which is given by Rho of this call option. Similar interpretations could be made for the other two 3 month call options.

If we next look at the results of the put option prices and their Greeks, then for a 6 month puts, the option price would be $ 136.71. This is the current cost of this 6 month put option for an exercise price of $ 5,800. If the market moves up or down by 1 point, then the theoretical price of the option would change by -0.6068 and this is given by the delta of this option. The delta would change by 0.0016, if the market moves up or down by 1 point; this is given by gamma of the put option.

The change in the theoretical price of this put option would decline by -0.1563 if 1 day passes. This is given by Theta of the option. If the volatility of the asset goes up or down by 1 percentage point, then the theoretical price would change by 15.50, which is shown by Vega of this put option. Finally, if the interest rates move up or down by 1 percentage point, the theoretical price of call option would then change by -17.97, which is given by Rho of this put option. Similar interpretations could be made for the other two 6 month put options.........................

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