Answer
One-period binomial model
S_now 100 S_up 120 <-- = S_now*up Delta 0.5 <-- = (C_up - C_down)/(S_up - S_down)
up 1.2 S_down 80 <-- = S_now*down
down 0.8 disc_factor 0.9512294245 <-- = exp(-risk_free*T) q_up 0.6282 <-- = (1/disc_factor - down)/(up -down)
risk_free 0.05 q_down 0.3718 <-- = 1 - q_up
T 1 C_up 20 <-- = max(S_up - K, 0)
K 100 C_down 0 <-- = max(S_down - K, 0) expected_payoff 12.5636 <-- = q_up*C_up + q_down*C_down
call_option_value 11.95 <-- = disc_factor*expected_payoff
Period 0 1 One-period binomial model for a European call option
120 Cells shaded grey are inputs or parameters that can be altered.
Stock 100
80 Cells shaded blue are cells in which you must enter an appropriate formula to calculate the value.
In each case, the required formula is shown next to the cell to which it applies.
20 Complete the worksheet to calculate the option value. You can then experiment with the
Call option 11.95 parameter values to see how changing them affects the option value.
0
See the Answer worksheet for the completed calculation.