FINC621 Winter 2018-19 Lab Worksheet 01

Exploration of R in Finance (finc621-lab01)

About

This worksheet is your warm-up exercises to getting started with some R for finance, based on examples from the book. It is also your getting started with problems solving (no R required) and expressing your methods/answers using proper mathematical symbols and representations.

Setup

Remember to always set your working directory to the source file location. Go to ‘Session’, scroll down to ‘Set Working Directory’, and click ‘To Source File Location’. Read carefully the below and follow the instructions to complete the tasks and answer any questions. Submit your work to RPubs as detailed in previous notes.

Note

For clarity, tasks/questions to be completed/answered are highlighted in red color (color visible only in preview mode) and numbered according to their particular placement in the task section. Type your answers outside the red color tags!

Quite often you will need to add your own code chunk. Execute sequentially all code chunks, preview, publish, and submit link on Sakai following the naming convention. Make sure to add comments to your code where appropriate. Use own language!

Any sign of plagiarism, will result in dissmissal of work!

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Task 1: Charting Stock Time Series

This task follows the book’s R Example 1.1/p. 8 also exhibited in the R-Labs section R Labs1 from the book’s website (*). In order to work with R in finance we need to first install the package quantmod that allows us to retrieve financial data and conduct various statistical analysis.

# Require will load the package only if not installed 
# Dependencies = TRUE makes sure that dependencies are install
if(!require("quantmod",quietly = TRUE))
  install.packages("quantmod",dependencies = TRUE, repos = "https://cloud.r-project.org")

##### 1A) Insert in the code chunk below the rest of the code to calculate and chart the time series for stock GE. Follow the example in the book. Add comments, where appropriate, explaining what the particular line(s) of code is/are executing/solving for.

getSymbols('GE',src='yahoo', from="2000-01-01", to="2009-12-30")#this code get the stock price data for GE in during the period from2000-1-1 to 2009-12-30

[1] "GE"

##retrieve historical price data for General Electric Co. from Yahoo Finance
getSymbols('GE',src='yahoo', from="2000-01-01", to="2009-12-30")

[1] "GE"

##to see headers of file (OHLCV type)
names(GE)

[1] "GE.Open"     "GE.High"     "GE.Low"      "GE.Close"    "GE.Volume"   "GE.Adjusted"

Task 2: Comparing Performance of Stocks Time Series

This follows the book’s example 1.3.4 R Lab/p. 34 also R Labs 1 from the book’s website (*).

##### 2A) Insert the code chunk to chart instead the performance of Value Line Index VLIC (sort of benchmark), and four other stocks of your choice over a time period dating back one year from present date.

 symbols=c('VLIC','GE','KO','AAPL','MCD')
getSymbols(symbols,src='yahoo',from="2012-02-01",to="2013-02-01")

VLIC download failed; trying again.Error: VLIC download failed after two attempts. Error message:
HTTP error 404.

##### 2B) Write the mathematical form/representation, using proper math symbols, to describe the formula being calculated and plotted in the code
delta represents the change in the price of the option based on a one-point change in the stock. delta=△C/△S or △P/△S the delta is the partial derivatives with the respect to the model parameters that are liable to change.

##### 2C) Write a paragraph, in your own words, comparing the stock performances based on your assessment of the companies general business and their valuation vis-a-vis the market overall performance, and pertinent econonomical factors. The stock performance of these companies are quite different from each other. Delta would change as stock price changes, therefore the hedge position must be rebalanced. GE and AApl are techical companies,therefore the value and growth for the companies are quite big, and the stock price would fluctuate frequently. MCD is a company ralated to fast food, so the value of the company is large but the growth is ver stable. so the stock price of MCD would be more stable.

To add math symbols in R Markdown check the link MathinRmd.html. Many other examples are on Google. Following is an example: \(\sum_{n=1}^{10} n^2\). Other, less preferred options, is to neatly handwrite your equations on a paper or use own preferred tools like Microsoft Word, take a clear image capture of your work and include here. Hard to read work will be dismissed.

Below is an example on how to include an image. It is assumed that the image resides in the same folder as the worksheet. Otherwise the path to the folder where the image resides needs to be included in the name referencing below.

Caption Here

Task 3: Problem(s) Solving

This task does not require use of R code. You will however need to type your work here, using proper mathematical symbols and representations, or include a clear image capture of your work.

##### 3A) Solve for 1.3.8 Problem/p. 36. S0=25 ，K=20 ，underlying stock price would be 15~40. r=0.05 for 6 months for put-call parity, c-p=st-k.D the price of the put option is p=c+st-k.D=10.98

##### 3B) Solve for 1.3.9 Problem/p. 36 delta represents the change in option price based on one-point change in the stock price. delta=△C/△S or △P/△S delta hedging involves maintaining a delta neutral portfolio, the delta of an European call on non-dividend paying stock is N(d1), the delta of a European put on the stock is N(d1)-1.

*http://computationalfinance.lsi.upc.edu