Over the past 2 years, financial markets have seen high levels of volatility arising no least from the Covid 19 pandemic. High volatility imply greater level of difference in opinion in the market and how securities are priced. Under such circumstances, securities' value may deviate from their fair value more easily, or, in other words, mispriced. In this assessment, you will attempt to price options using the Binomial option pricing model to identify mispriced options. Armed with this information, determine an appropriate arbitrage strategy to exploit the opportunity presented (Part A). Given that arbitrage opportunities are often flitting, consider how you may instead employ options spread strategies to capitalize on the situation in light of the prevailing market outlook (Part B). A. Individual Component (20 marks) - indicate student name and ID against your respective individual component as marks are based on individual performance Option pricing (10 marks) and arbitrage (10 marks) 1. Use a two-step Binomial option pricing model to price both a Call and a Put option at 16th March 2022. Students within the group should choose DIFFERENT OPTION STRIKES of the SAME STOCK. The purpose is to identify a mispriced option in the market. Based on the fair value you calculated for your option, determine if your chosen option is undervalued or overvalued in the market. The risk-free rate is assumed to be 1.33%. Assume no dividend. Your report must: Show calculations for inputs required for the Binomial pricing model Document and explain all calculations pertaining to your chosen options Illustrate the two period binomial lattice, complete with labels for the values option at each node. (6 marks) of stock and (4 marks) Over the past 2 years, financial markets have seen high levels of volatility arising no least from the Covid 19 pandemic. High volatility imply greater level of difference in opinion in the market and how securities are priced. Under such circumstances, securities' value may deviate from their fair value more easily, or, in other words, mispriced. In this assessment, you will attempt to price options using the Binomial option pricing model to identify mispriced options. Armed with this information, determine an appropriate arbitrage strategy to exploit the opportunity presented (Part A). Given that arbitrage opportunities are often flitting, consider how you may instead employ options spread strategies to capitalize on the situation in light of the prevailing market outlook (Part B). A. Individual Component (20 marks) - indicate student name and ID against your respective individual component as marks are based on individual performance Option pricing (10 marks) and arbitrage (10 marks) 1. Use a two-step Binomial option pricing model to price both a Call and a Put option at 16th March 2022. Students within the group should choose DIFFERENT OPTION STRIKES of the SAME STOCK. The purpose is to identify a mispriced option in the market. Based on the fair value you calculated for your option, determine if your chosen option is undervalued or overvalued in the market. The risk-free rate is assumed to be 1.33%. Assume no dividend. Your report must: Show calculations for inputs required for the Binomial pricing model Document and explain all calculations pertaining to your chosen options Illustrate the two period binomial lattice, complete with labels for the values option at each node. (6 marks) of stock and (4 marks)
