are171a-final-exam-info-binomial-pricing-examples

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Binomial Option Pricing Examples Output Variables: C, call option value; DELTA, option delta; L, loan; PAYOFF, option payments in low and high stock outcomes; P, pretend probability of the high outcome; CT, call option expected value at expiration HIPCT, high percent (HI-5)/5; LOPCT, low percent (LO-5)/5 Input Variables: 5, stock price now; E, exercise price; RF, risk free rate over option period; HI, high outcome stock price; La, low outcome stock price The problem done in my notes: SERF LO HI PAYOFF 65 65 .025 52 81.25 0 16.25 Replicating Portfolio C DELTA L (l+RF)*L 7.9268 .55556 28.184 28.889 Risk Neutral Pricing C CT P 1-P LOPCT HIPCT RF 7.9268 8.125 .5 .5 -.2 .25 .025 Another variant of it, with higher RF (the pretend probabilities are not .5 now): INPUT VALUES OR ANY CHANGES TO THE VARIABLES :BINOPT>RF=3 S E RF LO HI PAYOFF ------ 65 65 .03 52 81. 25 0 16.25 Replicating Portfolio C DELTA L (l+RF) *L ------ ------ ------ -------- 8.0636 .55556 28.047 28.889 Risk Neutral Pricing C CT P 1-P LOPCT HIPCT ------ ------ ------ ------ 8.0636 8.3056 .51111 .48889 -.2 .25 RF .03
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Another variant, with still higher RF: INPUT VALUES OR ANY CHANGES TO THE VARIABLES :BINOPT>RF=5 S E RF LO HI PAYOFF ------ 65 65 .05 52 81. 25 0 16.25 Replicating Portfolio C DELTA L (l+RF)*L ------ ------ ------ -------- 8.5979 .55556 27.513 28.889 Risk Neutral Pricing C CT P 1-P LOPCT HIPCT RF ------ ------ ------ ------ 8.5979 9.0278 .55556 .44444 -.2 .25 .05 A different problem just for practice, with new input variable values: INPUT VALUES OR ANY CHANGES TO THE VARIABLES :BINOPT>S=55;E=60;RF=5;LO=50;HI=65
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This note was uploaded on 03/18/2010 for the course ARE 171A taught by Professor Whitney during the Winter '08 term at UC Davis.

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