case07 - Introduction to derivatives, Fall 2011 BUSI 588,...

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Introduction to derivatives, Fall 2011 BUSI 588, Case 7 Topalov Inc: Black-Scholes and binomial trees This case is optional (and on the geeky side). If inclined to learn where the Black-Scholes formula comes from, do please prepare it for class discussion on Monday, 9/19. You are the in-house-slave for doing all the option pricing algorithms at Topalov Inc. , an up and coming derivatives firm. Veselin Topalov himself has asked you to price a call option on the Grunfeld Defense Corp. (“the Grunfeld” from now on), a firm that you estimate has an annual standard deviation of 20%, with an expected return of 15%. The call option in question has a three month (0.25 years) maturity and a strike of $25. The Grunfeld is currently trading at $25, so the option is at-the-money. The term structure is flat at 5%. You dig out some of your old option pricing notes and find out that one can construct binomial trees to price call options, and that the standard way to calibrate the trees is to set u
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This note was uploaded on 11/25/2011 for the course BUSI 588 taught by Professor Staff during the Fall '10 term at UNC.

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case07 - Introduction to derivatives, Fall 2011 BUSI 588,...

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