University Finance Project: AMD Stock Analysis and Option Valuation

This project focuses on the financial analysis of AMD stock, specifically evaluating a down-and-in option. The analysis employs the binomial option pricing model and the Black-Scholes model to assess stock price volatility. The project delves into option pricing strategies, including the use of Monte Carlo simulation and the calculation of implied volatility. The study also examines Option Greeks (delta, gamma, vega, and rho) to analyze the movement of option prices and their sensitivity to various factors. The findings show the price of the European down and in the option was done which showed that the price of the option should be around $4.48. The analysis also incorporates the probability function tool to determine the price for the year 2019-2020. This project offers a comprehensive understanding of option pricing and risk management within the context of AMD stock.

Running head: FINANCE AND INVESTMENT ANALYSIS
Finance and Investment Analysis
Name of the Student:
Name of the University:
Author’s Note:

1FINANCE AND INVESTMENT ANALYSIS
Financial Analysis of AMD Stock
The AMD Stock valuation of the options was done in order to assess the stock price
volatility. The various aspects of the pricing strategy involved in the pricing and valuation of
options like the binomial option pricing model and black Scholes model are the main type of
techniques used. The option pricing models used in our case study specifies the nature of
stochastic or the uncertain process or movement of the underlying assets which was
considered as AMD stock. The Black Scholes model assumes that the share price follows a
geometric Brownian motion (GBM) which if simply stated evolves out of the lognormal
distribution. Thus ln [St/(St-1)] that is the compounded return on assets follows a normal
distribution. The binomial model used in our case study has determined the price of the
European Call Option assuming that the stock price flows a discrete process where the stock
can go up or down in a certain period of time (Smolira and Travis 2016).
The price of the European down and in the option was done which showed that the
price of the option should be around $4.48. The price of the Binomial European Option was
done where the price of the call option derived was around $4.48 the only thing which
showed changes were the four factors of Option Greeks that is gamma, Vega, theta and row.
The Option Greeks are known as static risk measurement tool for analysing the options and
the movement and other various factors of option price (Kumar 2018). Delta is the rate of
change of option price with respect to the stock price the barrier down in put option delta was
around -0.46 times this shows that if the stock price changes by 1 the put option price will
move by -0.46 in the opposite direction. The Gamma is the rate of change of delta with
respect to the share price or the underlying assets cet. par. The gamma for the down and in
the option of put option was around 0.032 this shows the rate of change of the delta when the
stock price changes by 1. The Vega is the rate of change of the option price with respect to

2FINANCE AND INVESTMENT ANALYSIS
change in the volatility of the underlying assets. The option buyer loves volatility while the
option seller hates volatility. Therefore Long Option Position i.e., both Call and Put have
positive Vega while it is crucial to note that he short term options may have negative Vega.
Whereas Vega of call= Vega of put= 0.06138 or 6.138%. It means that if volatility goes up
by 1% the price of both call and put option will rise by 6.138%. Whereas the Rho is the rate
of change of the option with respect to continuously compounded risk free interest rate. C+ is
a substitute of S+ which saves financing costs and gives the same amount of exposure while
P+ is a substitute of S- which results in losing interest income that would have been earned
by selling the shares. So Rho of Call is always positive while the same is negative for Put
Options. The Rho of Put down and in the option is around -0.05682 (Shafi, et al. 2018). The
probability function tool and the use of the Monte Carlo simulation, which helped us generate
the random number possibility by taking the mean of the share price in the historical times
and then multiplying the same with daily volatility, determined the price for the year 2019-
2020.
The Implied Volatility is the volatility implied by the current option price just as we
have Yield to maturity as the yield implied by the current bond price. We have [option price
(known) = function of (So, C, R, T, V (plug in)). Thus by inverting the BSM or the black
Scholes model or any other option pricing model to back out volatility. Thus volatility is
nothing but the price of the option in it relative terms (Leung and Sircar 2015).

3FINANCE AND INVESTMENT ANALYSIS
Reference
Kumar, A., 2018. A Study on Risk Hedging Strategy: Efficacy Of Option Greeks. Abhinav
National Monthly Refereed Journal of Research in Commerce & Management, 7(4), pp.77-
85.
Leung, T. and Sircar, R., 2015. Implied volatility of leveraged ETF options. Applied
Mathematical Finance, 22(2), pp.162-188.
Shafi, K., Latif, N., Shad, S.A., Idrees, Z. and Gulzar, S., 2018. Estimating option greeks
under the stochastic volatility using simulation. Physica A: Statistical Mechanics and its
Applications, 503, pp.1288-1296.
Smolira, J. and Travis, D.H., 2016. Using Political Event Derivatives to Illustrate the
Binomial Option Pricing Model.