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Ch11HullFundamentals5thEd

# Ch11HullFundamentals5thEd - Introduction to Binomial Trees...

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Fundamentals of Futures and Options Markets , 5 th Edition, Copyright © John C. Hull 2004 11.1 Introduction to Binomial Trees Chapter 11

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Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 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
Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 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 244) A 3-month call option on the stock has a strike price of 21.

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Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 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
Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 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, 5th Edition, Copyright © John C. Hull 2004 11.6 Valuing the Option The portfolio that is long 0.25 shares
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