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Exercises Lesson Binomial Trees

This document contains 5 exercises involving the valuation of European options using binomial trees. Each exercise provides the initial asset price, possible future prices, risk-free rate, option type (call or put), exercise price, and time to expiration. The answers to the option valuations are also provided for each exercise.

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David Businelli
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55 views1 page

Exercises Lesson Binomial Trees

This document contains 5 exercises involving the valuation of European options using binomial trees. Each exercise provides the initial asset price, possible future prices, risk-free rate, option type (call or put), exercise price, and time to expiration. The answers to the option valuations are also provided for each exercise.

Uploaded by

David Businelli
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Exercises (Binomial Trees)

Ex1

The price of an asset is $40. It is known that in a month the price will be equal to $42 or to $38. The risk
free rate is equal to 8% per annum(compounded continously). What is the value of a European call with an
exercise price of $ 39 and expiration in 1 month?

Answer: $1.69

Ex2

The price of an asset is $50. It is known that in six months the price will be equal to $45 or to $55. The risk
free rate is equal to 10% per annum (compounded continously). What is the value of a European put with
an exercise price of $ 50 and expiration in six months?

Answer: $1.16

Ex3

The price of a share is $ 100. It is expected that in each of the next semesters the price will rise or fall by
10%. The risk-free interest rate is equal to 8% per annum (compounded continuously). What is the value of
a European call with an exercise price of $ 100 and a maturity of 1 year?

Answer: $9.61

Ex4

(a) In the case considered by the previous application, what is the value of a European put with an exercise
price of $ 100 and maturity in 1 year? (b) Verify that the prices of the call and of the put satisfy the put-call
parity.

Answer: $1.92

Ex5

The price of a share is $ 50. It is known that in 2 months it will be equal to $ 53 or $ 48. The risk-free
interest rate is 10% per annum (compounded continuously). What is the value of a European call with an
exercise price of $ 49 and maturity in 2 months? Use the arguments on the absence of arbitrage
opportunities.

Answer: $2.23

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