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2 Binomial Tree Model (30 pts) As an analyst in an investment bank offering over-the-counter options, you are in charge of providing price quotes of
2 Binomial Tree Model (30 pts) As an analyst in an investment bank offering over-the-counter options, you are in charge of providing price quotes of various options written on the S&P 500 index. The multiplier of these options is $100 and the price is quoted in decimals with 1 point equal $100. 2 (a) (2 pts) You offer a price quote of 135 for a plain vanilla call option. If your customer would like to take a short position of 10 contracts, how many dollars does the customer need to pay or receive in this transaction? In the following questions (b)-(h), you use a 3-period binomial tree to calculate the the- oretical prices of different options with 3 months to maturity. The current USD risk-free rate (continuously compounded, annualized) is 1%. The dividend yield (continuously com- pounded, annualized) of the S&P 500 index is 1.7%. The estimated variance of daily returns of the S&P 500 index is 0.000145853. The current S&P 500 index level is 3,408. 2 Binomial Tree Model (30 pts) As an analyst in an investment bank offering over-the-counter options, you are in charge of providing price quotes of various options written on the S&P 500 index. The multiplier of these options is $100 and the price is quoted in decimals with 1 point equal $100. 2 (a) (2 pts) You offer a price quote of 135 for a plain vanilla call option. If your customer would like to take a short position of 10 contracts, how many dollars does the customer need to pay or receive in this transaction? In the following questions (b)-(h), you use a 3-period binomial tree to calculate the the- oretical prices of different options with 3 months to maturity. The current USD risk-free rate (continuously compounded, annualized) is 1%. The dividend yield (continuously com- pounded, annualized) of the S&P 500 index is 1.7%. The estimated variance of daily returns of the S&P 500 index is 0.000145853. The current S&P 500 index level is 3,408
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