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Derivatives and Risk Management, 1st Edition
book

Derivatives and Risk Management, 1st Edition

by Sundaram Janakiramanan
May 2024
Intermediate to advanced content levelIntermediate to advanced
542 pages
27h 26m
English
Pearson India
Content preview from Derivatives and Risk Management, 1st Edition
434 Derivatives and Risk Management
Under binomial option valuation, we use the backward-recursive method, starting from the end of the
tree and moving backwards.
Determine the intrinsic value of the option on its exercise date, which is at the end of year 2.
C
++
= Max [0, (99.674 – 99.75)] = 0
C
+ –
= Max [0, (100.599 – 99.75)] = 0.849
C
––
= Max [0, (101.369 – 99.75)] = 1.619
In the binomial model for interest rate options, the risk-neutral probability is 0.5. Further, the
option value must now be discounted at dierent interest rates depending on where the option is on the
tree.
0
f
1
= 4%
c = ?
1
f
1H
= 4.6251%
c
+
= ?
1
f
1H
= 3.7867% ...
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Publisher Resources

ISBN: 9781299447547Publisher Website