Question
Consider a 6-month European call option on a non-dividend paying stock where the current stock price is $60, the strike price is $65, the volatility
Consider a 6-month European call option on a non-dividend paying stock where the current stock price is $60, the strike price is $65, the volatility is 35%, and the risk free rate 5% per annum.
Value the option using a 3-step binomial tree.
You may perform this question in Excel. Increase the number of steps in the binomial tree in increments of three (3) steps each time recalculating the value of the option. Stop when you get to 51 steps.
That is: - use a 3-step binomial tree (step size = 2 months) and calculate the value of the option - then use a 6-step binomial tree (step size = 1 month) and calculate the value of the option - then use a 9-step binomial tree (step size = 0.667 of a month) and calculate the value of the option - then use a 12-step binomial tree (step size = 0.5 of a month) and calculate the value of the option - and so on until you get to 51 steps
Plot the binomial option value against the number of tree steps. Describe the pattern you observe.
show work in excel with steps and answers
Need to do show all the steps (3 to 51)
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