Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

which describes a short-cut method of valuing options in a binomial model. Do you find this simpler than the risk-free portfolio approach that we did

  1. which describes a short-cut method of valuing options in a binomial model. Do you find this simpler than the risk-free portfolio approach that we did in the class?

  1. Using this new approach, price an at-the-money (ATM) call option on a two-period tree based on the following inputs: S = 100, T = 1 yr, risk-free rate = 10% , vol = 20% (risk-free and vol numbers are annualized)

  1. Using any coding language which you are familiar with (R/VBA/Matlab/JAVA/C /Python etc.), code the above algorithm to get the price of a Call/Put option in a Binomial tree, where the number of steps in the tree can be given as an input to the code by the user along with the other pricing inputs. Attach this code.

(Dont forget to mention the language of the code. You can test your code with the above numbers or with any example from the text. Keep in mind that an efficient code will be always more useful to the trader to quickly price options on larger trees.)

  1. Using your code, attach a table of ATM call and Put option prices for the inputs in question 2 above, by only varying the number of periods in the tree from 5 to 250 (in steps of 25). Also submit the Black-Scholes prices for these options. This will tell us something about the price convergence.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Municipal Finances A Handbook For Local Governments

Authors: Catherine D. Farvacque-Vitkovic, Mihaly Kopanyi

1st Edition

082139830X, 978-0821398302

More Books

Students also viewed these Finance questions

Question

How will these issues affect the grade levels you will teach?

Answered: 1 week ago