Due Sunday November 8

Please turn in one assignment per group via Canvas

Please only work within your group, do not collaborate with other groups

Corporate Financial Risk Management

Fall 2020
Darvishan

Monte Carlo Simulation Project 1

Answer the following questions using Monte Carlo simulation with 1000 replications. I have
created an excel template for each question. You can download the template from Canvas
(Module: Monte Carlo Simulation). I have also listed the “steps” to completing the problems.
Please follow the steps and complete the simulations using the templates.

In each spreadsheet template you will see cells colored in a way that corresponds to the parts
of the question, something like:
part b.
part c.
part d.
part e.
part f.

So, for instance, when you get to part b. of question 1. which asks you to simulate ten dice rolls,
do this in the cells highlighted purple in the template. When you answer part d. (simulate the
outcome 1000 times) do this in the cells highlighted green.
1. (30 points) If you roll ten dice and add up the total, what is the probability that the total
greater than 33 and less than 40? Assume that the dice are “fair” (each number between 1
and 6 is equally likely to occur)
a. go to the “dice” sheet
b. simulate ten dice rolls
c. create the outcome variable of interest… summarize the total in a way that is
relevant to answering the question
d. simulate this outcome 1000 times using “Data table”
e. summarize the 1000 simulation runs in order to answer the question

2. (35 points) The S&P 500 index is worth $3300 currently. The risk-free rate is 3%. Assume you
bought a 12-month forward contract three months ago (it matures in 9 months). The forward
price is $4100. Use a three-period binomial risk neutral pricing model and Monte Carlo
simulation to answer two questions: what is the expected payoff of the forward contract on the
S&P500 Index? and what is the likelihood that the payoff is positive?
a. go to the “S&P” sheet
b. simulate three periods of stock returns
c. create the outcome variables of interest (the forward payoff and whether or not the
payoff is positive)
d. simulate this outcome 1000 times
e. summarize the simulation runs to find the expected payoff, and the likelihood it was
positive

3. (35 points) You currently do not have the coronavirus. You will interact with one person each
day for the next 14 days. Each day, assume that 5% of the population has the virus, and the
people you interact with are drawn randomly from the population. If any two people interact
and either has the virus, the other contracts the virus 100% of the time.

Answer two questions: In expectation, how many people will you infect? And, how likely is it
that you infect 5 or more people?
* if you get infected, you will not be cured within 14 days
*note that you cannot infect people that are already infected
*note that you cannot infect anyone on day 1 because you start uninfected

a. go to the “corona” sheet

b. simulate whether or not the person you interact with each day has the virus
c. summarize how many people you infect (first keep track of whether you are infected,
then count the uninfected people you interact with afterwards)
d. summarize whether or not the number you infect is 5 or greater
e. simulate 1000 times, keeping track of both outcome variables
f. summarize the simulation runs in order to answer the questions