Transcript Coca-Cola Stock Option - University of Arizona

Sample pages
from report.
Coca-Cola Stock Option
Financial Analysts
Doug Harrington
Brad Moore
Adam Simmen
Objective
• Our goal is to find a
fair value for a
European call option
for Coca-Cola
Incorporated.
Assumptions
In determining a fair option price, we must make five
assumptions based on market experience and financial theory.
• The future price of a stock cannot be predicted using past
history.
• Predictions on the future variations of a stock’s price can be
made using the past prices of the stock.
• All investments, whose values can be predicted
probabilistically, are assumed to give the same rate of return.
• The rate of return on a United States Treasury Bill will be the
assumed rate for all investments whose future value can be
predicted.
• All investments with the same expected rate of growth are
considered to be of equal value to the investor.
Stock Option Criteria
• Ticker Symbol: KO
• Strike Price:
– $45.00
• Starting Date:
– February 21, 2003
• Length of Option:
– 18 weeks
• Annual Risk-Free Interest
Rate:
– 4.1%
• Length of Historical Data:
– 7 years
Past Stock Performance
Past 5 Years of Historical Data
Normalized Ratios Continued
Normalized Ratios of Weekly Closing Prices
SAMPLE OF NORMALIZED RATIOS
Approx. f norm (r)
12.0
10.0
8.0
6.0
4.0
2.0
0.0
0.84
0.88
0.92
0.96
r
1.00
1.04
1.08
1.12
Pricing Our Option
• With the help of several Excel functions, we can
now estimate the closing price of our stock on April
18, 2003. (VLOOKUP and RANDBETWEEN)
• After 5,000 simulations, a synopsis of our results is
as follows… Remember: Strike Price = $45.00
Normalized Present
Value
Times Option
Used
Normalized Future
Value
Normalized Closing
Price
Minimum
30%
Minimum
Minimum
$0.00
$0.00
$19.03
Mean
Mean
Mean
$1.75
$1.78
$41.19
Maximum
Maximum
Maximum
$35.02
$35.52
$80.52
Conclusion
Suggestion Option Prices
Normalized Weekly Close Ratios: $1.50
Normalized Daily Close Ratios: $1.49
Normalized Averaged Weekly Ratios: $0.95
•The weekly close ratio and daily close ratios were both very close, but the
averaged weekly ratio was over half a dollar lower. Nonetheless, the
average daily ratios would ensure the price of the option to be the most
beneficial just based on the following reasons:
•It uses more data than the weekly close ratios.
•The entire week is accounted for.
•The fact that the stock may close extremely high or low on
the Fridays can be removed.