# Assignment 1 Answers

Winter 2013

Instructor: Yasin Janjua

Assignment # 1

Total Points (100)

Part I: Do the following Questions

1. Define American Call/Put option 10 pts

Answer

Options allow investors to hedge against risk. If one expects stock prices to rise, then he/she may like to invest in stocks. However, buying stocks also entails risk because of price fluctuation. The risk will be potentially large in case price falls to zero. In order to avoid risk one may like to buy a call option.

An American call option gives one the right, but not an obligation, to buy a specified number of shares of a stock for a specified price called exercise or strike price before the maturity date or on

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a. Answer: The variable mynorm needs to be created prior to using in a command. Here the variable we created is testnorm, which is used in the calculation of mu and same variable can be used (or renamed) in sigma (SD) calculation. Correction required here is

> sigma <- sd(testnorm)

Or alternatively

> mynorm <- testnorm b. Answer: Same as above, one needs to calculate sigma and mu prior to executing the second command line. One needs to add the following code lines. x <- seq(-4, 4, length = 1000) mu <- mean(x) sigma <- sd(x) y <- dnorm(x, mu, sigma) c. Answer: One needs to specify quotation marks “” around the option ‘blue’ lines(x, y, col = “blue”) 2. Do the following using R and attach a printout of graphs and codes used in analysis 30 pts

You may submit a black and white printout of the graph if you do not have a color printer, but code is required as it will verify the commands used for coloring the graph. a. Download the manual and data for Time Series Analysis with R, Part I by Walter Zucchini, Oleg Nenadi´ for reference as you may need it to complete the assignment. http://www.statoek.wiso.uni-goettingen.de/veranstaltungen/zeitreihen/sommer03/ts_r_intro.pdf b. Download data file tui.zip from the website given in manual http://134.76.173.220/tui.zip and read it in