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    Inominal Ption Ricing Odel: B O P M

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    VIHARI D
    The document describes the Binomial Option Pricing Model (BOPM). BOPM uses a discrete time, binomial tree approach to model the price of an underlying asset over time. The model assumes the asset price can move up or down by fixed amounts at each time step. It provides an example calculation of a European call option using BOPM with parameters of a $100 stock price, $105 strike price, 25% volatility over 3 time steps. The model is solved through backward induction to calculate the option value at each node in the binomial tree.

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    Inominal Ption Ricing Odel: B O P M

    Uploaded by

    VIHARI D
    43 views9 pages
    The document describes the Binomial Option Pricing Model (BOPM). BOPM uses a discrete time, binomial tree approach to model the price of an underlying asset over time. The model assumes the asset price can move up or down by fixed amounts at each time step. It provides an example calculation of a European call option using BOPM with parameters of a $100 stock price, $105 strike price, 25% volatility over 3 time steps. The model is solved through backward induction to calculate the option value at each node in the binomial tree.

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    Black sholes

    Original Title

    BSOPM-

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    The document describes the Binomial Option Pricing Model (BOPM). BOPM uses a discrete time, binomial tree approach to model the price of an underlying asset over time. The model assumes the asset price can move up or down by fixed amounts at each time step. It provides an example calculation of a European call option using BOPM with parameters of a $100 stock price, $105 strike price, 25% volatility over 3 time steps. The model is solved through backward induction to calculate the option value at each node in the binomial tree.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    43 views9 pages

    Inominal Ption Ricing Odel: B O P M

    Uploaded by

    VIHARI D
    The document describes the Binomial Option Pricing Model (BOPM). BOPM uses a discrete time, binomial tree approach to model the price of an underlying asset over time. The model assumes the asset price can move up or down by fixed amounts at each time step. It provides an example calculation of a European call option using BOPM with parameters of a $100 stock price, $105 strike price, 25% volatility over 3 time steps. The model is solved through backward induction to calculate the option value at each node in the binomial tree.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 9

    BINOMINAL OPTION

    PRICING MODEL

    BOPM
    BOPM…1
    BOPM >> 2 Characteristics::
     DISCRETE TIME

    UP µ
    BINOMINAL Generation
    DOWN d
     µ = eσ . √T/n
     d = e-σ . √T/n
    BSOPM…2
    • ASSUMPTIONS::
    1.Length of time period is same
    2.Volatility is constant
    3.Transition probe (TP) is constant
    4.Trees re-combe
    BSOPM…3
    • Spot price is Rs::100/-; Strike price is Rs 105/-;
    Volatility is 25%; RFR 5%, Time 3 steps.

    µ = eσ . √T/n e 0.25 . √ 1/3 = 1.1553

    d = e-σ . √T/n = 0.8656


    T0 T1 T2 T3

    154.14

    133.47

    BSOPM…4
    115.53
    115.53

    100 100.00

    86.58 86.58

    74.96

    64.86

    Up= 1.1553; down = 0.8656


    BSOPM…5
    • Tp = e r.(t/n) – d
    µ-d

    • e 0.05.(1/3) – 0.8656 = 0.5219


    1.1553 - 0.8656
    T0 T1 T2 T3

    154.14 –
    105= 49.14

    133.47

    115.53 115.53 –
    105 =10.53

    100 100.00

    86.58 ( <St)
    86.58 = ‘0’

    74.96
    64.86 ( <St)
    = ‘0’

    Call = e –r.t {p.(cu) + (1-p) cd}


    T0 T1 T2 T3

    49.14

    30.204
    2

    10.53

    15.404
    8

    Call = e –0.05.1/3 {0.5219.(49.14) + (1-0.5219) .10.53} = 30.2042


    Call = e –0.05.1/3 {0.5219.(10.53) + (1-0.5219) .0} = 15.4048
    T0 T1 T2 T3

    105 - 86.58
    = 18.42

    105-64.86
    =40.14
    Call = e –0.05.1/3 {0.5219.(18.42) + (1-0.5219) .40.14}
    Call = e –0.05.1/3 {0.5219.(0) + (1-0.5219) .18.42}

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