PLEASE can u demonstrate the binomial tree model for this question! And tell me how to...

PLEASE can u demonstrate the binomial tree model for this question! And tell me how to work out the payoffs for the 2 period put!! Thanks

Q- The current price of Excel Network Systems stock is £60 per share. In each of the next two years the stock price will either increase by 20% or decrease by 10%. The 3% one year risk free rate of interest will remain constant. Calculate the price of a two year European put option on Excel Network Systems stock with a strike price of £60. Use binomial pricing

Solutions

Expert Solution

The numbers in brackets are the payoffs from the option.

Let P be the probability of upside movement.

P = 0.434848

Option Price at Node A = e-003{(0.4348*26.4)+(0.565152*4.8)} = 13.77

Option Price at Node A = e-0.03{(0.4348*4.8)+(0.565152*0)} = 2.025584

Option Price at Node F = e-0.03{(0.4348*13.77)+(0.565152*2.02558)} = 6.923202

I am sure this is self explanatory, still if you feel you need help, do let me know.

jeff jeffy answered 1 year ago

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