A B C D E F G So $25 2 u 1.04 3 d 0.95 4 Pup 0.55 5 P down 0.
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Question

Suppose the today's price for an AB3 share is $25. Over any given month, the share price may either go up by 4%

with a probability of 0.55, or go down by 5% with a probability of 0.45. We are interested in pricing a European call option expiring in 4 months with a strike price of $24. The risk free rate of return is 3% per annum. These inputs have been included in your template spreadsheet. First, fill in the binomial tree for the share price using the given data. Then fill in the option value tree using appropriate formulas. The entry in cell B16 should be the value of the call option today.


Screen Shot 2019-10-01 at 10.56.29 am.png

Screen Shot 2019-10-01 at 10.56.29 am.png

A
B
C
D
E
F
G
So
$25
2
u
1.04
3
d
0.95
4
Pup
0.55
5
P down
0.45
6
Expiry (months)
4
7
Strike price
$24
8
9
Time
0
1
2
W
4
10
Share price tree
25
11
12
13
14
15
16
Option value tree
17
18
19
20
21

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