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Homework answers / question archive / Construct a binominal option pricing model to calculate the value of a European style call option with the following information; Exercise price RM32 Volatility 15% Probability (up and down) 50% Risk free rate 6% per annum Price movement 3 times
Construct a binominal option pricing model to calculate the value of a European style call option with the following information; Exercise price RM32 Volatility 15% Probability (up and down) 50% Risk free rate 6% per annum Price movement 3 times
For Calculation of stock price
Upward Movement 15% And downward movement 15%
For Calculation Of value of
A=48.668-32=16.668 ( Positive then Payoff, If negative then Pay-off is 0
B=35.972-32=3.972
C = 26.588-32=0
D = 190652-32=0
Now Probability Given is 50%=0.5 so, 1-P=1-0.5=0.5
Riskfree Rate if 6%
E = P*Upward payoff+(1-P)*Downward Payoff = 16.668*0.5+3.972*0.5 = 9.375
(1+Riskfree Rate) 1+0.06
Similarly
F = 3.972*0.5+0*0.5 = 1.8735
1.06
G = 0*0.5+0*0.5 = 0
1.06.
H = 9.735*0.5+1.8735*0.5 =5.4757
1.06
I = 1.8375*0.5+0*0.5 = 0.8837
1.06
J= Value of Option= 5.4757*0.5+0.8837*0.5 = 2.9997 =3
1.06
Value of Option is RM 3
please see the attached file for the complete solution
