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Consider a European ?put? option on a non?dividend...




Consider a European ?put? option on a non?dividend?paying stock where the stock price is $100, the strike price is $110, the risk?free rate is 2% per annum, the volatility is 35% per annum, and the time to expiration is 4 months. Q1: Calculate u, d, and p for a two?step tree using a spreadsheet. Hint: If the expiration is 4 months and there are two steps, then the length of each step (dt) is 2 months (=2/12). Q2: Find the option price using a two?step tree in spreadsheet. Do not use Derivagem for this part. Q3: Use the Derivagem to verify the same price (use Binomial?European with tree steps = 2). Copy paste the Derivagem output and the price tree after clicking ?display tree.? Hint: Make sure that Q2 and Q3 have the same option price. Q4: Use Derivagem to price the same option using 5, 50, 100, and 500 steps. Include 4 Derivagem outputs but do not include the trees because Derivagem won?t display trees with more than 10 steps. Q5: Calculate the Black?Scholes option price using Derivagem. Use Option Type = Black?Scholes ? European. Which number of steps in Q4 results in the closest price to the Black?Scholes price? Q6: Explain why one can?t use Derivagem to solve Q5 in page 293.


Paper#6840 | Written in 18-Jul-2015

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