BEAM046 Financial Modelling

Individual Assignment
(70% of Total Module Assessment)

Released: 12:00 on 30 November 2020
Submission Deadline: 12:00 on 11 January 2021
(Late Submission Penalties Will Apply)

Maximum Length: 2,000 words
(Excluding Title Page, Tables, Figures, Equations and

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, which can be found at http://intranet.exeter.ac.uk/business-school/students/postgraduatetaught/learningresources/referencing/
• You do NOT need to submit the Excel workbook with your calculations, only the report itself
• Penalties for late submission: You will be penalised if you submit your assignment after the deadline. Details of the penalties for late submission can be found here: http://as.exeter.ac.uk/academic-policy-standards/tqa-manual/aph/settingandsubmission/#late