Assignment-Financial Modelling
Introduction
The assessment for the course is split into two parts: Part A Proposal (a group
assignment that counts for 30%) and Part B Financial Model (an individual
assignment that counts for 70%). Together, the two parts of the assignment
involve the design and construction of a financial model. In Part A you were
required to write a proposal for the financial model, while in Part B (i.e. this
assignment), you are required to implement a revised version of the
financial model.
The original task is summarized as follows: you are an analyst in an investment
bank and you are analyzing the risk of an investment in options on Procter and
Gamble stock (ticker symbol PG). You should compute the VaR at a variety of
confidence levels for a position in a call option on PG stock with a maturity that is
as close as possible to three months, and for a strike price that is about 90% of
the current stock price. The VaR horizon is the maturity of the option. You should
also estimate the corresponding VaR for a position in the underlying stock. You
should incorporate in the simulation the expected return of the stock, and any
dividends that it pays.
Requirements of the Assignment
For this assignment, you should undertake the following tasks:
Task 1: Use the Monte Carlo simulation approach to estimate the VaR and CVaR
of the PG call option using the following parameters (note: you do NOT need to
estimate the VaR or CVaR of the stock):
Option strike price: 125.00
Expiration date: 25 February 2021
VaR confidence levels: 50%, 60%, 70%, 80%, 90%
VaR horizon: the remaining life of the option
Volatility: implied volatility of the option
Risk free rate: current 3-month US Treasury bill yield
Expected return: assume to be zero
Dividends: assume to be zero
Task 2: Undertake one or more sensitivity analyses to explore the robustness of
your results to the assumptions made.
You should write up the completed financial model in a report of no more than
2,000 words, excluding title page, tables and figures, formulas and references.
In writing up your report, you should adhere to the following guidelines:
• Your report should be professionally presented. You could assume that it will
be read by the senior management of the company and so it needs to be neat,
properly structured and clearly and concisely written. This is an important
skill in practice.
• You should use the following structure for your report:
Title page
Executive summary: this should briefly summarise the analysis and its main
findings.
Method and data: this should concisely describe your calculations and the
data on which they are based
Results: this presents the results of your financial model, including the
sensitivity analysis. You should provide a critical discussion of your results.
Conclusion: this should summarise the main findings of the model, critically
evaluate any shortcomings of the data and method, and offer some
suggestions for future work
References: these should be alphabetically listed and properly formatted
(see below)
• You should NOT include appendices in your report
• You should make creative use of properly presented tables and charts. Tables
and charts should be accompanied by detailed explanatory notes. Look at any
paper in a good finance journal to see how to present a table of results (I have
put a sample of a Journal of Financial Economics paper in the Assessment
Information section on ELE, but feel free to look at others also).
• Do NOT include Excel screen prints. Also, you do NOT need to describe the
specific steps you took in Excel or the functions used.
• You should pay attention to the formatting of your reports, particular with
respect to line spacing, paragraphs and section titles
• You should use Equation Editor in Microsoft Word to format any equations
• You should define any variables that are used in equations
• Your report should also follow the School’s guidelines on referencing, citation
and avoiding plagiarism.
• You do NOT need to submit the Excel workbook with your calculations, only
the report itself