Problem 4: Option Masterst Let us see for ourselves how the different determinants of option pricing impact the value of an option. We will start with our two basic options and then have one variable, that affects the price of the option, change each time. All options will be solved with a one-stage binomial tree. Type Stock Price Strike Price Future Prices (Volatility) Time to expiration Interest rate Call Put 100 100 100 100 1. Price the above options. u=1.2, d=0.8 u=1.2, d=0.8 1 year 1 year 10% 10% 2. Price the same options as in (1), when the current stock price is $110 (instead of $100). Explain the differences in the results. 3. Price the same options as in (1), when the strike price is $110 (instead of $100). Explain the differences in the results.
Problem 4: Option Masterst Let us see for ourselves how the different determinants of option pricing impact the value of an option. We will start with our two basic options and then have one variable, that affects the price of the option, change each time. All options will be solved with a one-stage binomial tree. Type Stock Price Strike Price Future Prices (Volatility) Time to expiration Interest rate Call Put 100 100 100 100 1. Price the above options. u=1.2, d=0.8 u=1.2, d=0.8 1 year 1 year 10% 10% 2. Price the same options as in (1), when the current stock price is $110 (instead of $100). Explain the differences in the results. 3. Price the same options as in (1), when the strike price is $110 (instead of $100). Explain the differences in the results.
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
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Transcribed Image Text:Problem 4: Option Masterst
Let us see for ourselves how the different determinants of option pricing impact the value of an
option. We will start with our two basic options and then have one variable, that affects the price
of the option, change each time. All options will be solved with a one-stage binomial tree.
Type Stock Price Strike Price Future Prices (Volatility) Time to expiration Interest rate
u=1.2, d=0.8
Call
Put
100
100
100
100
1. Price the above options.
u=1.2, d=0.8
1 year
1 year
10%
10%
2. Price the same options as in (1), when the current stock price is $110 (instead of $100).
Explain the differences in the results.
3. Price the same options as in (1), when the strike price is $110 (instead of $100). Explain
the differences in the results.
4. Price the same options as in (1), when the future prices are $140 and $60 (higher volatility).
Explain the differences in the results.
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