Cox Ross and Rubin stein published their seminal paper where they developed the Binomial Option Pricing Method (BOPM) in 1979. In particular they stated the values for the up and down parameters as u = e 1 ốt and d: = e where o is the volatility and St the length of time between nodes. The historical volatility is estimated by S and 1 n-1 i=1 In these expressions r; is ith compound return, is the aver age return. There are n +1 stock price measurements with T years between each measurement. (i) Pick a company listed on the FTSE 100 and download a years worth of daily stock price data. (ii) Estimate the volatility based on this data. (iii) Set up an Excel spreadsheet to price a European Call Option. Assume the Call Option h as an expiry date 10 months in the future and the risk-free rate is 4.5%. You should price the Call Option using a 5-step tree. You should choose a sensible value for the strike. The spreadsheet should be set up in such away that you can alter the strike and the values should update.
Cox Ross and Rubin stein published their seminal paper where they developed the Binomial Option Pricing Method (BOPM) in 1979. In particular they stated the values for the up and down parameters as u = e 1 ốt and d: = e where o is the volatility and St the length of time between nodes. The historical volatility is estimated by S and 1 n-1 i=1 In these expressions r; is ith compound return, is the aver age return. There are n +1 stock price measurements with T years between each measurement. (i) Pick a company listed on the FTSE 100 and download a years worth of daily stock price data. (ii) Estimate the volatility based on this data. (iii) Set up an Excel spreadsheet to price a European Call Option. Assume the Call Option h as an expiry date 10 months in the future and the risk-free rate is 4.5%. You should price the Call Option using a 5-step tree. You should choose a sensible value for the strike. The spreadsheet should be set up in such away that you can alter the strike and the values should update.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Cox Ross and Rubin stein published their seminal paper where they developed the Binomial Option
Pricing Method (BOPM) in 1979. In particular they stated the values for the up and down parameters
as
1
= e°Vốt and d =
St
u =
= e
where o is the volatility and ốt the length of time between nodes. The historical volatility is estimated
by
O =
and
In these expressions r; is ith compound return, is the average return. There are n+1 stock price
measurements with T years between each measurement.
(i) Pick a company listed on the FTSE 100 and download a years worth of daily stock price data.
(ii) Estimate the volatility based on this data.
(iii) Set up an Excel spreadsheet to price a European Call Option. Assume the Call Option has an
expiry date 10 months in the future and the risk-free rate is 4.5%. You should price the Call
Option using a 5-step tree. You should choose a sen sible value for the strike. The spreadsheet
should be set up in such away that you can alter the strike and the values should update.
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