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# Option value today is given by setting up the option

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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 \$340.9 \$469.4 \$194.7 \$268.1 -\$194.7 -\$194.7 \$0.0 \$73.4 Buy 0.57 share Borrow PV(X) Total payoff - 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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