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