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Stochastic Finance - Assignment Example

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Stock’s terminal value S has a uniform distribution: that is, it is equally likely to assume any value in the range (0-100) and will not assume any value outside of this range. The random variable x on which this stock’s value is based has a density function p(x) =1 for 0…
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Stochastic Finance
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Download file to see previous pages (a). Using Yahoo finance I settled on three companies; AAC Holdings, Inc., 1347 Capital Corp. and Alexco Resource Corp traded at NYSE, NASQAD and AMEX respectively and obtained daily closing stock prices for each company for six consecutive weeks commencing 13th April 2015 to 22nd May 2015. (see excel calculations)
(b). The table in the appendix 1 also shows the results of the calculation for the logarithmic daily changes in the closing stock price for each of the three companies for six consecutive weeks. The formula;
The curve shown in the graph above clearly indicates the performance in the stock markets. The daily closing stock prices for AAC Holdings, Inc, a company in the NYSE markets tends to be stable by showing a regular trend in growth over the first few weeks. The growth rate however slows down in the last weeks.
As compared to the scenario in AAC Holdings, Inc, the trend here is a steady upward growth till the end. This pattern in growth however cannot be reliably adopted to predict the future state of the stock price for 1347 Capital corp. Investors without proper analysis can easily be lured to invest in such stocks since they promise high level of returns in a short time but can also drop in value drastically.
Alexco Resource Corp though in a different stock market (AMEX) has the lowest stock prices with an average of$ 0.41. At this price Investors are attracted to invest but only when the trend in growth is consistent. This case proves the same as the stock prices keep on going up for the entire six week period.
Inflation weakens the value of the local currency against the foreign currency in other words foreign exchange (Ross, S. 2003). A general rise in prices for most of the products means that the input prices for production of various goods and services are rising. In this case market analysts and fund managers will always consider the net impact on the margin of the entity that they are tracking.
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