Financial Analysis: Quantitative Methods, Maths & Simulation

This report delves into quantitative methods and financial mathematics, analyzing trajectory simulation and hedging strategies. It presents a table illustrating gains and losses under different trajectories, highlighting the impact of short share actions and cumulative money. The report emphasizes that effective debt management strategies determine financial outcomes, with even minor changes in assumptions significantly affecting gains or losses. Additionally, it discusses hedging as a risk management tool, including gamma hedging and delta hedging, and provides a real-world example of hedging foreign exchange fluctuations. The attached excel sheet contains detailed calculations, further illustrating the lender's and borrower's positions based on lending strategies and financial conditions. Desklib provides this document as well as many other resources for students.

Running head: QUANTITATIVE METHODS AND FINANCIAL MATHS
Quantitative Methods and Financial Maths
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1QUANTITATIVE METHODS AND FINANCIAL MATHS
Contents
Report:.............................................................................................................................................2
Story about hedging:........................................................................................................................4
References:......................................................................................................................................6

2QUANTITATIVE METHODS AND FINANCIAL MATHS
Report:
Before getting into the discussion about the amount of money gained or loss due to
trajectory simulation let has have the table containing the amount of money loss or gain under
different trajectories.
Action Amount of
money( positive=lending)
Cumulative
money
Interest
short share 30.48851 30.48851 0.07622
0.50814 6.84512 37.40986 0.09352
0.11720 -4.98483 32.51855 0.08130
-0.08323 12.81653 45.41638 0.11354
0.22534 2.07122 47.60114 0.11900
0.03651 6.47036 54.19050 0.13548
0.11786 1.57952 55.90550 0.13976
0.02881 0.02382 56.06909 0.14017
0.00043 -14.18209 42.02718 0.10507
-0.23642 -0.86408 41.26816 0.10317
-0.01423 18.02637 59.39770 0.14849

3QUANTITATIVE METHODS AND FINANCIAL MATHS
It is visible from the above table that short share action of 0.50814 the amount of positive
lending is $30.48851 with interest of $0.07622 thus, the gain would be $6.85 (Approx.) with
short share action of 0.11720 the amount of cumulative money is $32.52 indicating a loss of
$4.98. With negative short share action of (0.08323) the amount of gain would be highest with
$12.82 and cumulative money would be $45.42 (Approx.). As can be seen gain would continue
till the following position when the cumulative money would be $56.07.
0.22534 2.07122 47.60114 0.11900
0.03651 6.47036 54.19050 0.13548
0.11786 1.57952 55.90550 0.13976
0.02881 0.02382 56.06909 0.14017
Subsequent to that the short share action position of 0.00043 the cumulative money would be
$42.03 with a loss of $14.18. However, with short share action of (0.01423) the cumulative
money would reach maximum amount of $59.40 with a gain of $18.03.
It is clear from the above that the strategy to manage the debt will determine the amount of gain
or loss from the debt position. Even the slimmest changes in underlying assumptions the net
impact on gain or loss on lending is clearly visible in the detailed calculation provided in the
attached excel sheet. The position of the lender as well as borrower would depend on the lending
and borrowing strategy and the financial conditions in different times.

4QUANTITATIVE METHODS AND FINANCIAL MATHS
Story about hedging:
An advanced strategy to manage investment, hedging is based on simple principles. Due
to the popularity of hedging to manage investment, it has become a widespread term with the
investors however, the understanding of the term is still limited. Apart investment hedging is also
used by business organizations to manage its accounts receivables, account payable and other
monetary assets and liabilities.
It is quite fascinating to know that most people even without recognizing are entering into
hedging contracts on regular basis. As an example a person taking life insurance on his life to
make provision for the family subsequent to the person’s death is a type of hedge (Nelson, 2018).
Changes in options delta increase the risk of loss in investments. Gamma hedging helps in
reducing and sometime completely eliminating the risk created due changes in option delta. The
change in prices of underlying assets is compensated by the Gamma. In modern day business
environment the use of hedging options have spread significantly as more and more business
organizations are not only using hedging strategy to protect the investment properties but also to
reduce the risks of foreign exchange fluctuations on the amount of accounts receivable and
accounts payable as well as other financial obligations denominated in foreign currencies. In
order to minimize the price movement of an option delta hedging is used. Effective use of
hedging can help an organization to minimize the risk of loss due to changes in foreign exchange
rates. For example an Australian organization that has accounts receivable to the tune ₤150,000
from a customer situated in the United Kingdom would be able to reduce the risk of losing
significant amount of money despite negative foreign exchange fluctuations by effective use of
hedging strategy (Awudu, Wilson & Dahl, 2016).

5QUANTITATIVE METHODS AND FINANCIAL MATHS

6QUANTITATIVE METHODS AND FINANCIAL MATHS
References:
Awudu, I., Wilson, W., & Dahl, B. (2016). Hedging strategy for ethanol processing with copula
distributions. Energy Economics, 57, 59-65.
Nelson, M. C. (2018). Technological strategies responsive to subsistence stress. In Evolving
complexity and environmental risk in the prehistoric Southwest (pp. 107-144). CRC
Press.