For one of the options that you evaluated in Exercise 1, evaluate the sensitivity of its binomial option values to different volatilities. Use the HVG screen to help you select the volatilities (e.g., a past volatility or one calculated with different moving averages).

Exercise 1.

Using Bloomberg information, estimate the equilibrium price on a call and put option on a selected stock using the BOPM Excel program. Bloomberg option input information:
a. Stock price: DES or GP screen.
b. Option exercise price: Option's DES, OMON, or Call screen or OSA.
c. Option exercise price and expiration: Option's DES, OMON, or Call screen or OSA. Input days to expiration.
d. Risk-free rate: FIT screen; "Treasury" tab. Select Treasury with maturity closest to the option's expiration.
e. Volatility: HVG screen. Select historical volatility or implied volatility.
f. Annual dividend yield: BDVD screen. Use the BOPM Excel program and evaluate the option price for \(n=30\) subperiods. How close does the model's option price come to the market price? Experiment with different volatilities until you find one that gives you a binomial option value that is close to the market price.