The sensitivity analysis. Introduction: Sensitivity Analysis: The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant. Scenario Analysis: The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario. Simulation Analysis: Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.

Question

Use the binomial method to determine the value of an American Put option at time t = 0. The option expires at time t = T = 1/2 and has exercise price E = 55. The current value of the underlying is S(0) = 50 with the underlying paying continuous dividends at the rate D = 0.05. The interest rate is r = 0.3. Use a time step of St = 1/6. Consider the case of p = 1/2 and suppose the volatility is σ = 0.3. Perform all calculations using a minimum of 4 decimal places of accuracy. =

Answer 1

Question

Chapter 12, Problem 9Q

a)

Summary Introduction

To explain: The sensitivity analysis.

Introduction:

Sensitivity Analysis:

The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant.

Scenario Analysis:

The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.

Simulation Analysis:

Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.

b.

Summary Introduction

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

c.

Summary Introduction

To explain: The simulation analysis and the project on which the simulation will be applied.

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Use the binomial method to determine the value of an American Put option at time t = 0. The option expires at time t = T = 1/2 and has exercise price E = 55. The current value of the underlying is S(0) = 50 with the underlying paying continuous dividends at the rate D = 0.05. The interest rate is r = 0.3. Use a time step of St = 1/6. Consider the case of p = 1/2 and suppose the volatility is σ = 0.3. Perform all calculations using a minimum of 4 decimal places of accuracy. =

Consider a European chooser option with exercise price E₁ and expiry date T₁ where the relevant put and call options, which depend on the value of the same underlying asset S, have the same exercise price E2 and expiry date T₂. Determine, in terms of other elementary options, the value of the chooser option for the special case when T₁ = T2. Clearly define all notation that you use.

The continuous conditional probability density function pc(S, t; S', t') for a risk neutral lognormal random walk is given by Pc(S, t; S', t') = 1 σS'√2π(t' - t) - (log(S/S) (ro²)(t − t)] exp 202 (t't) In the binomial method, the value of the underlying is Sm at time step môt and the value of the underlying at time step (m + 1)St is Sm+1. For this case evaluate Ec[(Sm+1)k|Sm] = [°° (S')*pc(S™, mdt; S', (m + 1)8t)dS' showing all steps, where k is a positive integer with k ≥ 1. You may assume that 1 e (x-n)2 2s2dx = 1 for all real numbers n and s with s > 0.

Answer 2

Question

Chapter 12, Problem 9Q

a)

Summary Introduction

To explain: The sensitivity analysis.

Introduction:

Sensitivity Analysis:

The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant.

Scenario Analysis:

The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.

Simulation Analysis:

Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.

b.

Summary Introduction

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

c.

Summary Introduction

To explain: The simulation analysis and the project on which the simulation will be applied.

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Answer 3

Question

Chapter 12, Problem 9Q

a)

Summary Introduction

To explain: The sensitivity analysis.

Introduction:

Sensitivity Analysis:

The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant.

Scenario Analysis:

The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.

Simulation Analysis:

Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.

b.

Summary Introduction

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

c.

Summary Introduction

To explain: The simulation analysis and the project on which the simulation will be applied.

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Answer 4

Question

Chapter 12, Problem 9Q

a)

Summary Introduction

To explain: The sensitivity analysis.

Introduction:

Sensitivity Analysis:

The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant.

Scenario Analysis:

The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.

Simulation Analysis:

Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.

b.

Summary Introduction

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

c.

Summary Introduction

To explain: The simulation analysis and the project on which the simulation will be applied.

Expert Solution & Answer

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Answer 5

Chapter 12, Problem 9Q

a)

Summary Introduction

To explain: The sensitivity analysis.

Introduction:

Sensitivity Analysis:

The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant.

Scenario Analysis:

The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.

Simulation Analysis:

Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.

b.

Summary Introduction

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

c.

Summary Introduction

To explain: The simulation analysis and the project on which the simulation will be applied.

Answer 6

Chapter 12, Problem 9Q

a)

Summary Introduction

To explain: The sensitivity analysis.

Introduction:

Sensitivity Analysis:

The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant.

Scenario Analysis:

The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.

Simulation Analysis:

Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.

Answer 7

Chapter 12, Problem 9Q

a)

Summary Introduction

To explain: The sensitivity analysis.

Introduction:

Sensitivity Analysis:

The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remain constant.

Scenario Analysis:

The process to evaluate different probable events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.

Simulation Analysis:

Simulation analysis is an extended version of sensitivity analysis that has improved the evaluation process as it considers detailed inputs. It can record the effect of changes in multiple input variables at once.

Answer 8

b.

Summary Introduction

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

Answer 9

b.

Summary Introduction

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

Answer 10

c.

Summary Introduction

To explain: The simulation analysis and the project on which the simulation will be applied.

Answer 11

c.

Summary Introduction

To explain: The simulation analysis and the project on which the simulation will be applied.

Answer 12

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Ch. 12 - Prob. 1Q Ch. 12 - Prob. 2Q Ch. 12 - Explain why net operating working capital is...Ch. 12 - Why are interest charges not deducted when a...Ch. 12 - Prob. 5Q Ch. 12 - What are some differences in the analysis for a...Ch. 12 - Distinguish among beta (or market) risk,...Ch. 12 - Prob. 8Q Ch. 12 - Prob. 9Q Ch. 12 - If you were the CFO of a company that had to...

Solution Summary: The author explains that sensitivity analysis reflects the change in the end result of a project. Simulation analysis considers changes in multiple inputs at the same time.

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

To explain: The simulation analysis and the project on which the simulation will be applied.

Chapter 12 Solutions

Solution Summary: The author explains that sensitivity analysis reflects the change in the end result of a project. Simulation analysis considers changes in multiple inputs at the same time.

To explain: The scenario analysis Introduction: Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.

To explain: The simulation analysis and the project on which the simulation will be applied.

Chapter 12 Solutions

To explain: The scenario analysis

Introduction:

Scenario analysis is the process to reflect the outcome in different probable scenarios. It changes the estimates based on the depended factors.