Coca-Cola Stock Option

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Presentation transcript:

Coca-Cola Stock Option 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

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% $0.00 $19.03 Mean $1.75 $1.78 $41.19 Maximum $35.02 $35.52 $80.52

Suggestion Option Prices 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.