Monte Carlo Analysis: FBMKLCI

Out-of-money structured FBMKLCI put warrant (code: 06502L) shall be expiring on 31 July 2017. It has a strike price of 1,625.00 which is significantly below the current index price of FBMKLCI of 1,791.31 (16 June 2017).

H2L.png

What is the likely chance that this put warrant will be in-the-money upon its expiry?

The current volatility of FBMKLCI has recently dropped to historical low level (i.e below 10%) (as shown in the graph below).

HVOL.png

Monte Carlo Analysis

  • Assumed annual volatility of FBMKLCI is based on 11.17% (which is the 1-month predicted forward volatility as per the NYU Lab Stern website);
  • For simplicity, it is assumed  that there are 44 trading days (equals numbers of days to maturity for the structured put warrant, but in actual fact, there could be less trading days due to public holidays and weekends); and
  • 1000 simulations of projected index price of FBMKLCI in 44 days

ExcelSnapshot.png

Based on these simplistic assumptions, it is observed that there is only five (5) percent that the FBMKLCI will fall below 1,644.43  (note that the structured put warrant’s strike price is 1,625.00). 

The biggest caveat to this analysis is the assumed volatility. The above analysis assumes that FBMKLCI’s volatility will remain at a stable low level in the next 44 days. If this assumption does not hold, there will be higher likelihood that the FBMKLCI may reach the warrant’s strike price.

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Author: Ken Utau

Markets Analyst. Forecaster & Predictor. Statistician. Data Explorer & Scientist. Specialize In Data, Market & Security Analysis.

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