Since each period is 3 month ie 025 year the changes

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Unformatted text preview: 83 Corporate Finance Options In the prior example the upside and downside change to the Google stock price was +17.35% (469.4/400 1= 0.1735) and -14.78% (340.9/400 - 1 = -0.1478), respectively. The percentage upside and downside change is determined by the standard deviation on return to the Google stock, which is equal to 32%. Since each period is 3 month (i.e. 0.25 year) the changes must equal: 1  upside change u e V h e 0.32 0.35 1.1735 1  upside change d 1/u 1/1.1735 0.8522 Multiplying the current stock price, $400, with the upside and downside change yields the stock prices of $469.4 and $340.9 in Month 3. Similarly, the stock prices in Month 6 is the current stock price conditional on whether the stock price increased or decreased in the first period. Please click the advert 9.3.2 Black-Scholes’ Model of option pricing The starting point of the Black-Scholes model of option pricing is the insight from the binominal model: If the option’s life is subdivided into an infinite number of sub-periods by making the time intervals shorter, the binominal three would include a continuum of possible stock prices at maturity. In Paris or Online International programs taught by professors and...
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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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