Multi Period Binomial Trees Assignment The current spot price of an asset is So = $50. Each month the price could increase to 1.10 times its current value (u=1.10), or it could decrease to (1/1.10) times its current value (d=1/1.10) The interest rate is 25 basis points per month. 5. What is the payoff (one value for each value of S2) to a 5% out of the money call? 6. What is the expected value of the call payoff and the premium on the call? 7. What is the premium on the call if the strike is $1 higher? Why? Consider options maturing in 12 months. 8. What is the premium on a 5% out of the money call maturing in 12 months? 9. Compare the premium on the 2-month and 12-month calls. Why do longer dated options have higher premium, ceteris paribus? 10. Repeat questions 8 & 9 for a put with the same parameters. Multi Period Binomial Trees Assignment The current spot price of an asset is So = $50. Each month the price could increase to 1.10 times its current value (u=1.10), or it could decrease to (1/1.10) times its current value (d=1/1.10) The interest rate is 25 basis points per month. 1. What is the risk neutral probability for this problem? 2. What is the forward price F2? Consider options maturing in 2 months. 3. What is the terminal distribution (values and probability) of the time 2 spot price Sz? The "binom.dist" function in excel is helpful. https://support.microsoft.com/en-us/office/binom-dist-function-c5ae37b6-f39c-4be2-94c2- 509a1480770C 4. What is the expected value of S2 and how does this relate to the forward price F2? The "sumproduct" function in Excel is also helpful. https://support.office.com/en-us/article/sumproduct function-16753e75-9f68-4874-94ac- 4d2145a2fd2e 5. What is the payoff (one value for each value of S:) to a 5% out of the money call? 6. What is the expected value of the call payoff and the premium on the call? 7. What is the premium on the call if the strike is $1 higher? Why? Multi Period Binomial Trees Assignment The current spot price of an asset is So = $50. Each month the price could increase to 1.10 times its current value (u=1.10), or it could decrease to (1/1.10) times its current value (d=1/1.10) The interest rate is 25 basis points per month. 5. What is the payoff (one value for each value of S2) to a 5% out of the money call? 6. What is the expected value of the call payoff and the premium on the call? 7. What is the premium on the call if the strike is $1 higher? Why? Consider options maturing in 12 months. 8. What is the premium on a 5% out of the money call maturing in 12 months? 9. Compare the premium on the 2-month and 12-month calls. Why do longer dated options have higher premium, ceteris paribus? 10. Repeat questions 8 & 9 for a put with the same parameters. Multi Period Binomial Trees Assignment The current spot price of an asset is So = $50. Each month the price could increase to 1.10 times its current value (u=1.10), or it could decrease to (1/1.10) times its current value (d=1/1.10) The interest rate is 25 basis points per month. 1. What is the risk neutral probability for this problem? 2. What is the forward price F2? Consider options maturing in 2 months. 3. What is the terminal distribution (values and probability) of the time 2 spot price Sz? The "binom.dist" function in excel is helpful. https://support.microsoft.com/en-us/office/binom-dist-function-c5ae37b6-f39c-4be2-94c2- 509a1480770C 4. What is the expected value of S2 and how does this relate to the forward price F2? The "sumproduct" function in Excel is also helpful. https://support.office.com/en-us/article/sumproduct function-16753e75-9f68-4874-94ac- 4d2145a2fd2e 5. What is the payoff (one value for each value of S:) to a 5% out of the money call? 6. What is the expected value of the call payoff and the premium on the call? 7. What is the premium on the call if the strike is $1 higher? Why
