6. Option pricing - Multiperiod binomial approach The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes for a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based on market-and firm-specific factors. Use the following formula to calculate the value of any call option within the same time period. To use the formula for different call options, you can solve this formula with algebra or program it into a spreadsheet. e'rlt) / u e'rlt) CU d u-d +C d u d Vc = et) Based on your understanding of the binomial option pricing model, is the following statement true or false? Cu and Cd are the only variables that directly depend on the option itself. False O True You have the following information about LearnMore Inc.'s stock and a two-month call option with a strike price of $109.20. LearnMore Inc.'s current stock price is $84.00. You are using the multiperiod binomial option pricing model to find the value of the two-month option with two periods. Ilu and Ild values given here apply to any period. Data Collected for Learn More Inc. u 1.3134 d 0.4975 0.4848 II. Ild 0.1847 You work with a junior analyst to calculate the value of the option, and she submits her inferences to you. Which of the following points are true in the case of LearnMore Inc.'s stock options? Check all that apply. The value of the call option will always remain $0.55, irrespective of the time until expiration. The value of the one-month call option with a strike price of $109.20 at the end of one month will be $0.55. The option payoff if the stock goes up in one month will be $1.13. Learn More Inc.'s stock price after one month likely will be $41.79 if the stock goes down by a factor of 0.4975. 6. Option pricing - Multiperiod binomial approach The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes for a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based on market-and firm-specific factors. Use the following formula to calculate the value of any call option within the same time period. To use the formula for different call options, you can solve this formula with algebra or program it into a spreadsheet. e'rlt) / u e'rlt) CU d u-d +C d u d Vc = et) Based on your understanding of the binomial option pricing model, is the following statement true or false? Cu and Cd are the only variables that directly depend on the option itself. False O True You have the following information about LearnMore Inc.'s stock and a two-month call option with a strike price of $109.20. LearnMore Inc.'s current stock price is $84.00. You are using the multiperiod binomial option pricing model to find the value of the two-month option with two periods. Ilu and Ild values given here apply to any period. Data Collected for Learn More Inc. u 1.3134 d 0.4975 0.4848 II. Ild 0.1847 You work with a junior analyst to calculate the value of the option, and she submits her inferences to you. Which of the following points are true in the case of LearnMore Inc.'s stock options? Check all that apply. The value of the call option will always remain $0.55, irrespective of the time until expiration. The value of the one-month call option with a strike price of $109.20 at the end of one month will be $0.55. The option payoff if the stock goes up in one month will be $1.13. Learn More Inc.'s stock price after one month likely will be $41.79 if the stock goes down by a factor of 0.4975
