When using binomial approach and Black-Scholes formula for pricing options, do you expect the results to...

When using binomial approach and Black-Scholes formula for pricing options, do you expect the results to be the same? (3)Why or why not? (2) Price a put and a call with data offered below using both methods and show the prices. Do your results support initial expectations? (5)

Present stock price $30, exercise price $40, interest rate 5%, option expires one year from now, volatility 27%, stock will either move up by 40% or down by 27%.

Expert Solution

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

1. THERE IS A SLIGHT DIFFERENCE BETWEEN BINOMIAL AND BLACK SCHOLES MODEL BECAUSE BLACK SCHOLES IS A CONTINOUS PROCESS WHILE BINOMINL IS A PERIODIC PROCESS (OR STEPWISE PROCESS).

2. BINOMIAL.

3. BLACK SCHOLES.

jeff jeffy answered 1 year ago

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