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Assessed Midterm Coursework

Submit online via QMplus before 23:59 London Time on Wednesday 20th March 2024

ECOM209 R for Finance

This coursework carries a maximum of 100 marks. A 30% weighting will be applied to your overall ECOM209 module score for completion.

You are required to submit a typed document in Word or PDF format containing written analysis together with any supporting tables, graphics and R code you think is necessary.

The work required is detailed on the next page. Your code and analyses are required in R.

This coursework has a maximum word count of 1500 words excluding R output and any code that you submit.

This coursework must be your own work and answers are required in your own words.

Option Valuation using R

Use the material from the session on More Functions that covered option valuation to help you with the following questions. You will also have to undertake some textbook research.

Question 1

i. Develop equity call and put valuation R functions for European options that incorporate the payment of dividends. Ensure that your R functions are suitably (not overly) documented using # statements. Explain in detail what your functions do and any assumptions you have made.

ii. Use two or three examples to show that your option valuations are sensible. Such examples might come from textbooks, academic papers, newspapers (such as the Financial Times) and/or the Bloomberg Terminal.

iii. What effect does the payment of dividends have on the price of a calls and puts from the point of view of an option buyer?

[40 marks]

Question 2

i. Describe in detail how American exercise equity options are valued.

ii. Develop R functions to value American style calls and puts (with or without dividend payment is acceptable). Ensure that your R functions are suitably documented.

iii. Use examples to show that your option valuations are sensible.

iv. Show that the premiums for American options are generally greater than or equal to their corresponding European equivalents.

[60 marks]