Ch11HullFundamentals6thEd

Ch11HullFundamentals6thEd - Introduction to Binomial Trees...

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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 11.1 Introduction to Binomial Trees Chapter 11
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 11.2 A Simple Binomial Model A stock price is currently $20 In three months it will be either $22 or $18 Stock Price = $22 Stock Price = $18 Stock price = $20
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 11.3 Stock Price = $22 Option Price = $1 Stock Price = $18 Option Price = $0 Stock price = $20 Option Price=? A Call Option ( Figure 11.1, page 248) A 3-month call option on the stock has a strike price of 21.
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 11.4 Consider the Portfolio: long shares short 1 call option Portfolio is riskless when 22 – 1 = 18 or = 0.25 22 – 1 18 Setting Up a Riskless Portfolio
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 11.5 Valuing the Portfolio (Risk-Free Rate is 12%) The riskless portfolio is: long 0.25 shares short 1 call option The value of the portfolio in 3 months is 22 × 0.25 – 1 = 4.50 The value of the portfolio today is 4.5e – 0.12 × 0.25 = 4.3670
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 11.6 Valuing the Option The portfolio that is
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Ch11HullFundamentals6thEd - Introduction to Binomial Trees...

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