You are about to price a call option that has a strike price of $30 and...

You are about to price a call option that has a strike price of $30 and has a maturity of 9-months. You know the current risk-free rate for all periods up to a year is 4.95% with continuous compounding, the current stock price is $28.75, and the stock’s volatility is 25%. Use CRR approach for u & d when needed.

What is the value of this European put option using a 4-step binomial tree?

Solutions

Expert Solution

Up Move (u) = eVolatility * Square Root of dT
Down Move (d) = 1 / Up Move

Probability of Up Move = [(er*dT) - d] / (u-d)
Probability of Down Move = 1 - Probability of Up Move

Calculation of Value of Call Option

Value of Call Option at Expiry = Maximum of either (Underlying Price - Strike Price) or 0

Value of Call Option at 0 = $3.29

Calculation of Put Option
Value of Put Option at Expiry = Maximum of either (Strike Price - Underlying Price at T) or 0

Value of Put Option = $3.08

jeff jeffy answered 1 year ago

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