Question IV.3. Using binomial trees, calculate the value of an European call option (in the beginning of the first year
Posted: Thu May 05, 2022 7:52 am
Question IV.3.
Using binomial trees, calculate the value of an European call
option (in the beginning of the first year) with the following
characteristics:
Underlying asset current value S0 = 150.
Option exercise price X = 150.
Up movement in period 1 u1 = 1.1.
Down movement in period 1 d1 = 1/u1.
Up movement in period 2 u2 = 1.3.
Down movement in period 2 d2 = 1/u2.
The risk-free asset exists. Risk-free rate in period 1 rf1 =
5%
Risk-free rate in period 2 rf2 = 3%.
Time to expiration T = 2 years.
Number of time periods per year: 1.
The steps you will need to follow include
• Create the event tree for the underlying risky asset.
• Calculate whether to exercise the options and
payoffs.
• Use either replicating portfolio technique or risk-neutral
probability technique to value the option. Hint: S u 1 = S0 ∗
u1
Using binomial trees, calculate the value of an European call
option (in the beginning of the first year) with the following
characteristics:
Underlying asset current value S0 = 150.
Option exercise price X = 150.
Up movement in period 1 u1 = 1.1.
Down movement in period 1 d1 = 1/u1.
Up movement in period 2 u2 = 1.3.
Down movement in period 2 d2 = 1/u2.
The risk-free asset exists. Risk-free rate in period 1 rf1 =
5%
Risk-free rate in period 2 rf2 = 3%.
Time to expiration T = 2 years.
Number of time periods per year: 1.
The steps you will need to follow include
• Create the event tree for the underlying risky asset.
• Calculate whether to exercise the options and
payoffs.
• Use either replicating portfolio technique or risk-neutral
probability technique to value the option. Hint: S u 1 = S0 ∗
u1