Binomial Option Pricing Case 1: A stock is currently priced at $39/share and pay

Question

Binomial Option Pricing Case 1:
A stock is currently priced at $39/share and pays no dividends. The periodic risk-free rate of interest is 2%. The up factor of 1.25 and a down factor of 0.8.

Binomial Option Pricing Case 1: In a two-period binomial tree option pricing model, if after one period, the stock price moved down, what is the new delta value for a delta-neutral portfolio on a written two-period European call with a strike price equal to $35?

1.

0.713

0.

0.285.

A.

1.

B.

0.713

C.

0.

D.

0.285.

Explanation / Answer

Option C is correct

Two Step Binomial Tree

American Call Option

Using Two period Binomial

If the Value of the option falls downwards then the valur of option falls to 0 after single period

Two Step Binomial Tree

54.69 43.75 35 28 22.4 Up factor u 1.25 Down factor d 0.8 Risk free interest rate r 2% R 1+r Probability of increase R-d/u-d 1.02-0.8/1.25-0.8 0.22/0.45 0.49 Probability of decrease 1-p 1-0.49 0.51

American Call Option

Using Two period Binomial

19.69 9.46 4.540 0.00 0 0 Value of Option Cup*p+Cup(1-p)/R after one period (19.69*0.49+0*0.51)/1.02 9.46 Value of option Cup*p+Cup(1-p)/R after two period 9.46*0.49+0*0.51/1.03 4.54

If the Value of the option falls downwards then the valur of option falls to 0 after single period

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