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Unformatted text preview: nload free ebooks at 81 Corporate Finance Options Example: - Two-period binominal method for a 6-month Google call-option with a exercise price of $400 issued at the money. Now Month 3 Month 6 $469.4 $550.9 $400.0 $400 $340.9 $290.5 - - In the first 3-month period the stock price of Google can either increase to $469.4 or decrease to $340.9. In the second 3-month period the stock price can again either increase or decrease. If the stock price increased in the first period, then the stock price in period two will either be $550.9 or $400. Moreover, if the stock price decreased in the first period it can either increase to $400 or decrease to $290.5. To find the value of the Google call-option, start in month 6 and work backwards to the present. Number in parenthesis reflects the value of the option. Now Month 3 Month 6 $469.4 ($73.4) $550.9 ($150.9) $400.0 ($0) $400 ($35.7) $340.9 ($0) - $290.5 ($0) In Month 6 the value of the option is equal to Max[0, Stock price - exercise p...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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