Derivatives and Financial Markets

Topic: Pricing options using binomial trees

We will use a 1-step binomial tree to price Dell call and put options with May 2004
maturity and $35 strike price. The closing prices of these options were $0.7 and $3
respectively on February 27, 2004 (see attached PDF file.) Dell’s stock price was $32.65
at the time, and the 3-month LIBOR rate was 1.12% with continuous compounding. The
options’ May maturity was 85 days away, which in years is 85/366 = 0.23224.

Readings:
Chapter 12: Sections 12.1, 12.2, 12.7 (see only equations 12.11-12.14), Fundamentals of Futures
and Options Markets.

ASSIGNMENT:
Chapter 12: 12.1-12.4, 12.9, and 12.10

© Walid Busaba, Ivey Business School, 2021