Assignment 1 Answers Essay

1034 Words Jun 14th, 2013 5 Pages
Financial Econometrics (AP/ECON 4140 S2)
Winter 2013
Instructor: Yasin Janjua
Assignment # 1
Total Points (100)

Part I: Do the following Questions

1. Define American Call/Put option 10 pts

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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The most important calendar anomalies identified by Sewell are the January effect and the weekend effect. b. There are several different types of calendar effects identified in literature. * Intraday effects are known to exist, * the weekend effect seems to have all but disappeared, * intramonth effects were found in most countries, * the January effect has halved, and * holiday effects exist in some countries. * Halloween Indiactor: a trading strategy of tactical asset allocation based on the old saying * ‘sell in May and go away’ generated abnormal returns in comparison with stock market indices in most countries * Daylight Saving Effect: Daylight-saving weekends are typically followed by large negative returns on financial market indices (roughly 200 to 500 per cent in comparison to weekend effect), and researchers argue that the effect could be because of changes in sleep patterns.

Part II: R-Code Programming 1. An R programmer ran the following code and he/she got an error message.
a) > testnorm <- rnorm(1000) > hist(testnorm, prob = TRUE) > mu <- mean(testnorm) > sigma <- sd(mynorm) Error in sd(mynorm) : object 'mynorm' not found

b) > x <- seq(-4, 4, length = 1000) > y <- dnorm(x, mu, sigma) Error in dnorm(x, mu, sigma) : object

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