To evaluate the current price we rst have to nd the

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Unformatted text preview: one-period option written on MNO security with exercise price of $100 when the risk free interest rate is 2%? To evaluate the current price we first have to find the cashflows at the option exercise date. The cash flow of a call option at maturity could be found by looking at the payoff diagram Call Option ✻ ￿ ￿ ￿ ￿ ￿ ￿ ￿ ✲ Alternatively we could use the formula: In this case, the two possible values of the underlying in this case are and . It is only in the case where the price of the underlying is greater than the exercise price of the option that the option has any value. ✟ ✟✟ ✟✟ ❍ ❍❍ ✯ ✟ ✟✟ ❍ ❍❍ To price we need also need the values ❍ ❥ ❍ and in the formula Suppose there are traded two digital options, one that pays off $1 if NMO stock is at 105, another that pays off $1 if NMO stock is at 95. The prices of these digital options are and . We use these prices to find and : 92 Pricing Derivatives and value the option as In general, we calculate the values of one-period call and put options as: Example The price of a put option on MNO with exercise price 100 is found as 10.3 Interpreting...
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This document was uploaded on 02/15/2014 for the course BEM 103 at Caltech.

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