Calibrating the BS model and Constructing a Hedging StrategyMatlab

Java Python Project: Calibrating the BS model and Constructing a Hedging Strategy

We have learned multiple models and formulas for pricing options. In this project, we seek to explore the application of pricing options in real life using multiple tools, and assess the accuracy of our method. We will also make a hedging strategy for the options using delta.

We are going to choose a stock and collect data on the stock and option prices, and then estimate the price of the options using our tools. In particular, the project involves 1) calibrating the

Black-Scholes model to get the implied volatility (sigma that minimizes the SSE between the market prices&nb Calibrating the BS model and Constructing a Hedging StrategyMatlab sp;of the options and the price generated by the BS model), 2) estimating the prices of the options using replication with the BS model, 3) computing the profit or loss from this strategy, and 4) constructing a hedging strategy. In addition, we will make a comparison between using sigma from this method and sigma estimated from historical data.

Our project will require the stock price, call and put option prices, and the time to maturity. We will get most of the data from Yahoo Finance.

This project will be based on Lecture 3 & 4 (Week 3-4)