Question
a) Consider a stock that is currently trading at $45. Its volatility is 35% and the risk-free rate is 2% per annum with continuous compounding.
a) Consider a stock that is currently trading at $45. Its volatility is 35% and the risk-free rate is 2% per annum with continuous compounding. Using the Cox-Ross-Rubinstein binomial tree with three steps, compute the price of a 3-month call on a 9-month call in which the 3-month call has a strike of $2 and the 9-month call has a strike of $45. Both options are European.
Answer this question in Excel. Name the worksheet as binomial. You can choose to answer this question in MATLAB, in which case, attach a MATLAB script file with functions (if any) at the end of the file.
b) Briefly discuss two attractive features of the binomial model compared to the Black-Scholes-Merton model.
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