Tom Curtis has prepared a hypothetical problem for you and your group to solve.

Question

Tom Curtis has prepared a hypothetical problem for you and your group to solve. He wants you to utilize the two-period binomial option pricing model to solve certain problems. If your team passes this test, you might soon be developing derivative strategies for Ricardo International to use.

Individual Portion Individually conduct research on two different models used to price call options. Detail each model in a Word document and focus on comparing and contrasting the models. Post your document to the Small Group Discussion Board

Please sude Binomal option Model and Black scholes model

Explanation / Answer

Black-Scholes Model vs. Binomial Model-Valuation Models

Definition: “A call option is an agreement that gives the investor right not obligation to invest in the stock, bond, commodity etc at the specific price in a specific timeframe.”

“The profit is made when the asset price increases.”

Two models namely Black-Scholes and Binomial options are used to analyze the value of an option, both have their advantages and disadvantages, discussing as follows:

· Risk-free

This model follows a fixed calculation method and does not allow for any flexibility in case of changes in other parameters for example price reset features and cannot be calculated from period to period basis.

The parameters if not recalculated would give same results as the Black-Scholes Model. The only disadvantage is that the model is very complex and would need a lot of complex calculation making it difficult to use on a regular basis.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.