Tree Parameters for a

Tree Parameters for a - K = 50; r =10%; = 40%; T = 5 months...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Tree Parameters for a Nondividend Paying Stock We will assume that u = 1/ d . When t is small we can estimate the option value using: 1 t r t t e a d u d a p e d e u σ - σ = - - = = =
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Stock Prices on the Tree S 0 u 2 S 0 u 4 S 0 d 2 S 0 d 4 S 0 S 0 u S 0 d S 0 S 0 S 0 u 2 S 0 d 2 S 0 u 3 S 0 u S 0 d S 0 d 3 2
Background image of page 2
Backwards Induction We know the value of the option at the final nodes. We work back through the tree using risk-neutral valuation to calculate the value of the option at each node, testing for early exercise when appropriate. 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Example: Put Option S 0 = 50;
Background image of page 4
Background image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: K = 50; r =10%; = 40%; T = 5 months = 0.4167; t = 1 month = 0.0833 The parameters imply u = 1.1224; d = 0.8909; a = 1.0084; p = 0.5073 4 Example (continued) 89.07 0.00 79.35 0.00 70.70 70.70 0.00 0.00 62.99 62.99 0.64 0.00 56.12 56.12 56.12 2.16 1.30 0.00 50.00 50.00 50.00 4.49 3.77 2.66 44.55 44.55 44.55 6.96 6.38 5.45 39.69 39.69 10.36 10.31 35.36 35.36 14.64 14.64 31.50 18.50 28.07 21.93 5...
View Full Document

Page1 / 5

Tree Parameters for a - K = 50; r =10%; = 40%; T = 5 months...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online