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Extension of Problem Set 9 deadline and plans for tomorrow’s Finance 4335 class meeting

I have extended the deadline for Problem Set 9 from tomorrow (Thursday, April 25) to Tuesday, April 30. This decision was inspired by a question from a Finance 4335 student, which also led me to publish a related blog post earlier today titled "Pricing Credit Risk Class Problem and Solutions…".

In tomorrow’s Finance 4335 class, we will begin by reviewing the solutions for the first part of the class problem included in the above-referenced blog post (also previously covered during last Thursday’s class meeting). We will complete our discussion of the credit risk topic by covering the second part of the class problem. The rest of the class tomorrow will be devoted to further discussing the topic of corporate risk management, which began in yesterday’s Finance 4335 class meeting.

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Problem Set 8 helpful hints

Here are some helpful hints to consider for Problems 1 and 2 on Problem Set 8 (Problem Set 8 is due by 11 am this Tuesday):

  • Problem 1, Part A: Since the call option described in Problem 1, Part A is initially out-of-the-money (i.e., since S = $18 and K = $20), there will be terminal nodes at which the call option expires in-the-money and others at which it expires out-of-the-money.  By solving the b = \ln (K/S{d^n})/\ln (u/d) equation and rounding to the nearest integer greater than b (referred to in the CRR equation below as the parameter “a“), this indicates the minimum number of up moves required such that this call option expires in–the–money.  Once you have this information, you can consider only those terminal nodes at which the call option expires in-the-money (which are nodes a through n) and calculate the call option price by applying the CRR call option pricing equation:  C = {e^{ - rT}}\left[ {\sum\limits_{j = a}^n {\frac{{n!}}{{j!\left( {n - j} \right)!}}{q^j}{{\left( {1 - q} \right)}^{n - j}}\left( {{u^j}{d^{n - j}}S - K} \right)} } \right]
  • Problem 1, Part B: Apply the put-call parity equation (C+Ke^{-rT} =P+S) to solve for the put option price.
  • Problem 2, (Scenario A): requires solving for call and put option prices using the Black-Scholes-Merton option pricing formulas.  See the Part 2 option pricing lecture note, page 18, for a numerical illustration of how to do this.
  • Problem 2, Scenario B requires finding the current price of the underlying asset, where the call, put, and exercise prices are all given.  Solve the put-call parity equation (C + K{e^{ - rT}} = P + S) for S.
  • Problem 2, Scenario C requires finding the exercise price, where the call, put, and underlying asset prices are all given.  Solve the put-call parity equation for K.
  • Problem 2, Scenario D requires finding \sigma for a call option worth $2.38 and a put option worth $3.60.  Feel free to use the Black-Scholes spreadsheet from the course website, or better yet, create your own Excel spreadsheet in which you solve for the call and/or the put by varying \sigma (this can be accomplished either via trial and error or better yet, by using either Solver or Goal Seek).  An important lesson you’ll learn from this part of problem 2 is that call and put option prices are positively related to \sigma .
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Extra Credit Opportunity: Barnabas Financial Forum: God and Money

I’m offering an optional extra credit opportunity that involves attending and reporting on the Barnabas Financial Forum: God and Money. It will be held on Tuesday, April 16, from 3:30-4:45pm in Foster 250. The speaker for the forum will be John Cortines, author of God and Money: How We Discovered True Riches at Harvard Business School.

If you take advantage of this opportunity, I will use the grade you earn on your report to replace your lowest quiz grade in Finance 4335. For this assignment, prepare a 2-3 page executive summary offering a thoughtful synopsis of what you learn from participating in the Barnabas Financial Forum. The report must be submitted here in PDF format via the Assignments section of Canvas no later than 5 p.m. on Friday, April 19.

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ICYMI: 5 Things You Need to Know About the Total Solar Eclipse and Diadeloso

5 Things You Need to Know About the Total Solar Eclipse and Diadeloso

The Total Solar Eclipse and Diadeloso on the Baylor University Waco campus are less than one week away on Monday, April 8. Here are five important things to know about the events.

1. Eclipse Over Texas is at McLane Stadium, Diadeloso is on campus.

The Eclipse Over Texas: Live From Waco events at McLane Stadium’s Touchdown Alley require a ticket to enter. General Admission tickets may be purchased online at eclipseovertexas2024.com. There are numerous educational and experiential opportunities, presentations and activities for the entire family to learn about the eclipse, including from Baylor’s own astrophysics faculty. A clear bag policy is in effect and participants will pass through magnetometers. Once you pass through security, you may not leave and then re-enter the event.

Diadeloso will be held on campus – Fountain Mall, Bear Park, Bill Daniel Student Center – with activities from 11 a.m. to 4 p.m. Diadeloso events for Baylor students, faculty and staff require a wrist band to participate. To help you safely view the eclipse, each wrist band will come with approved solar eclipse glasses.

  • Faculty and staff can pick up wrist bands with their Baylor ID from 11 a.m. to 2 p.m. April 3-5 in Bill Daniel Student Center.
  • On Monday, students can pick up wrist bands with their Baylor ID at two campus locations: 5th Street between the Bill Daniel Student Center and Marrs McLean Gym between 11 a.m. to 4 p.m.

A wrist band will be required for Dia’s traditional campuswide Noon Meal, which will be served in Penland Crossroads and East Village Dining Commons from 11 a.m. to 1 p.m. Wrist bands will also be available at these locations during the mealtime. Remember, you must show your Baylor ID to receive a wrist band. All other dining halls will be closed for lunch that day. The SUB food court will be open. Food trucks with specialty drinks, desserts and snacks for purchase will be available beginning at 11 a.m. in the parking lot behind Morrison Hall.

Diadeloso WILL include an Eclipse Watch with information and interesting facts about the total solar eclipse provided by Dr. Jared Fier from Baylor’s Department of Physics, from 1:15 p.m. to 1:45 p.m. on Fountain Mall, weather permitting.

Find the full schedule of Dia events and attractions at diadeloso.web.baylor.edu.

2. Weather may impact planned events.

City of Waco and Baylor officials are monitoring the weather forecast, which can evolve and change over the week. Plan ahead and be prepared for the weather to possibly impact these events. Eclipse Over Texas: Live from Waco will proceed rain or shine, unless the weather conditions become dangerous. Any updates will be posted at eclipseovertexas2024.com and communicated directly with ticketholders.

Diadeloso events also may be impacted by the weather. Please check diadeloso.web.baylor.edu and Student Life social media channels for updates. If weather turns severe, the University will communicate with campus via the Baylor Alert emergency notification system.

3. Traffic will be heavy in the area.

Waco is one of the largest cities in the solar eclipse path of totality, and that makes it a very popular location for thousands of visitors who want to see the event. Expect heavier than normal traffic and congestion in the Waco area from April 5-8 as events around the eclipse are planned in Waco through the weekend. Most roads in and around campus will be open but be prepared for traffic delays. We anticipate traffic around the Baylor campus on the day of the Eclipse will be similar to a football game day.

On April 8, we anticipate a significant number of visitors to the area who may not be familiar with University parking guidelines may park on campus.

Students without parking permits may park in designated student parking areas on campus on April 8.

Important note: The University is officially open on April 8. Staff are asked to coordinate their time away for the Eclipse Over Waco event or Diadeloso with their supervisors.

4. Special solar eclipse glasses are required for your safety.

IMPORTANT: You must use special solar eclipse glasses to safely view any portion of the eclipse. Traditional sunglasses or multiple pairs of sunglasses WILL NOT protect your eyes from damage.

NASA provides important information on how to protect your eyes during a Total Solar Eclipse:

  • View the Sun through eclipse glasses or a handheld solar viewer during the partial eclipse phases before and after totality.
  • You can view the eclipse directly without proper eye protection only when the Moon completely obscures the Sun’s bright face – during the brief and spectacular period known as totality.
  • As soon as you see even a little bit of the bright Sun reappear after totality, immediately put your eclipse glasses back on or use a handheld solar viewer to look at the Sun.

If you are watching an entire eclipse, you may be in direct sunlight for hours. Remember to wear sunscreen, a hat and protective clothing to prevent skin damage.

You also can watch the Total Solar Eclipse via Discovery and Science Channel livestreaming:

5. Eclipse academic and arts events are planned throughout the weekend.

There are many events across Waco and on campus to enjoy in the days preceding the eclipse and on the day of the eclipse. The city of Waco will celebrate with a weekend filled with concerts and activities. For a complete schedule of city events, visit the City of Waco website.

Baylor University also will offer several campus academic lectures, museum events and performances related to the Total Solar Eclipse, including a concert premiering music from new musical “American Eclipse,” a lecture with an Apollo 17 astronaut and panel discussion on the future of lunar exploration, and events at the Martin Museum of Art and Mayborn Museum. For a complete schedule of Eclipse events, visit the Baylor News website.

For additional questions, please check the Diadeloso and the Solar Eclipse FAQ.

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Kids Explain Futures Trading

For a simple and non-technical way to grasp the concepts of forward and futures contracts, look no further than this delightful video tutorial in which a group of five and six-year-old children explain the fundamentals of investing in corn, equity, and cocoa futures.

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Due date change for Quiz 8 (from 11 am on April 2 to 11 am on April 3)

Due to the delay in posting Quiz 8 today, the deadline for submission has been extended to 11 am on Wednesday, April 3. This quiz draws on the material outlined in the readings for April 2, which can be found on the course website’s Readings Page at http://fin4335.garven.com/readings:

1. "Derivatives and Options" from Doherty, Chapter 6

2. "Teaching the Economics and Convergence of the Binomial and Black-Scholes Option Pricing Formulas" by James R. Garven and James I. Hilliard