Options

Valuation using
Binomial Trees
By Kotra Subhadra Rucha
The Power Of The Binomial Tree
Breaks down the
valuation process

Provides Flexibility

Considers time
value of options

Understanding of
option behaviour
 Option Valuation
Calculate upward(u), downward(d) and probability(p) when a binomial tree is constructed to value an option on a
foreign currency. The binomial tree step size is “one month” considering spot rate as $121, the domestic interest rate is
5% per annum, the foreign interest rate is 8% per annum and the volatility is 12% per annum. The strike price is K=$122.

Soln : Given, Using formula, Thus, we get the values :

S0 = $121 σ = 12%
rd = 5% k = $122
rfor = 8%

Now, k (call option) = 122

Value of option
Thank You!