ADMS 4503 Lecture Notes - Lecture 10: Risk-Free Interest Rate, Option Style, Call Option

• School: York University
• Department: Administrative Studies
• Course: ADMS 4503
• Professor: Nabil Tahani

Document Summary

S0 = 50, k = 52, r = 5% t = 2y , m = 2, t= 1 y, u = 1. 2 ,, d = 0. 8. The payoff for a put is k st , or 0. Put = [ p2 x fuu + 2p(1-p)fud + (1-p)2 fdd] e-r x t. = [ p2 x 0 + 2p(1-p) 4 + (1-p)2x 20 ] e-5% x 2. Now, to standardize everyone"s value of u and d , we can use sigma ( the closest factor that affects the stock price ) to get : Note that u and d are inversely related. For american put options: note that you can exercise it at all possible times till the maturity date. You would have multiple step pay offs unlike the european options which miss out on the middle steps. Note: you would have to change the option value before that step by calculating intrinsic value and discounting it.