Unformatted text preview: payoff
- - Since the above portfolio has identical cash flows to the option, the price on the option is equal to the
sum of market values.
o Value of Google call option in month 3 = $469.4 - $400/1.01 = $73.4
If the stock price in Month 3 has fallen to $340.9 the option will not be exercised and the value of the
option is equal to $0.
Option value today is given by setting up the option equivalent (again). Thus, first calculate the option
equivalent. In this case the option delta equals 0.57 as ($73.4-$0)/( $469.4-$340.9) = 0.57.
Month 3 stock price equal to
$73.4 Buy 0.57 share
- As today's value of the option is the equal to the present value of the option equivalent, the option
price = $400 · 0.57 - $194.7/1.01 =$35.7. To construct the binominal three, the binominal method of option prices relates the future value of the
stock to the standard deviation of stock returns, , and the length of period, h, measured in years: (50) 1 upside change u eV h 1 upside change d 1/u Download free ebooks at bookboon.com...
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