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 how to calculate binomial option value(risk neutral valuation) using Excel with your own example ?

Finance Aug 08, 2020

 how to calculate binomial option value(risk neutral valuation) using Excel with your own example ?

Expert Solution

Current trading price=$400

It can go up =U=$800

It can go down=D=$200

Probability of going up=p

Probability of going down=q=1-p

Call strike price=$400(at the money)

U= uptick factor=800/400=2

D=down tick factor=200/400=0.5

Pobability of going up=p

Risk neutral probability=p=((e^(rt))-D)/(U-D)

r=risk free interest rate=5%=0.05

t=one period=1

p=((e^0.05)-0.5)/(2-0.5)

p=0.367514

q=1-p=0.632486

Payoff if price goes up=(800-400)=$400

Pay off if it comes down=$0

Net expected payoff after one year=400*0.367514+0= $ 147.01

Present value of payoff=147.01/(e^0.05)= $ 139.84

Call Option price= $ 139.84

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