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    The document describes an option pricing model using the binomial method. It presents an example where the writer of a call option must determine the option price. It assumes a current stock price of Rs. 20, a strike price of Rs. 20, and a maturity of 90 days. It analyzes two cases - when the stock price rises to Rs. 26 and when it falls to Rs. 14 - to determine that the option price should be Rs. 3,000 to cover the maximum possible loss. It also notes that the model can be used to analyze other stock prices at maturity.

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    General Beamer Theme 3

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    The document describes an option pricing model using the binomial method. It presents an example where the writer of a call option must determine the option price. It assumes a current stock price of Rs. 20, a strike price of Rs. 20, and a maturity of 90 days. It analyzes two cases - when the stock price rises to Rs. 26 and when it falls to Rs. 14 - to determine that the option price should be Rs. 3,000 to cover the maximum possible loss. It also notes that the model can be used to analyze other stock prices at maturity.

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    The document describes an option pricing model using the binomial method. It presents an example where the writer of a call option must determine the option price. It assumes a current stock price of Rs. 20, a strike price of Rs. 20, and a maturity of 90 days. It analyzes two cases - when the stock price rises to Rs. 26 and when it falls to Rs. 14 - to determine that the option price should be Rs. 3,000 to cover the maximum possible loss. It also notes that the model can be used to analyze other stock prices at maturity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    18 views11 pages

    General Beamer Theme 3

    Uploaded by

    aareeshaa 03
    The document describes an option pricing model using the binomial method. It presents an example where the writer of a call option must determine the option price. It assumes a current stock price of Rs. 20, a strike price of Rs. 20, and a maturity of 90 days. It analyzes two cases - when the stock price rises to Rs. 26 and when it falls to Rs. 14 - to determine that the option price should be Rs. 3,000 to cover the maximum possible loss. It also notes that the model can be used to analyze other stock prices at maturity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 11

    Option Pricing Model

    Binomial

    Mir
    Department of Management Science
    COMSATS University Islamabad, Attock

    March 25, 2021

    1/11
    Overview

    1. First Section

    2. Second Section

    2/11
    Option

    • Assume you are a seller and you are writing an option.


    • current price Cp =Rs.20
    • strike price Sp =Rs.20
    • maturity T =90 days
    • quantity N=1,000 shares
    • option price Co =?
    • Further, assume greatest variation in the history is = 30%.

    First Section 3/11


    Assumption

    maximum change = 20 × 0.3 = ±6


    So price will vary between the range of 26 to 14.

    Assumption
    Assume we have purchased half of shares at the current market price i.e., 500 shares at
    Rs.20 amounting Rs. 10,000.

    First Section 4/11


    Case A

    first case
    Assume Market price Mp =26 after 90 days.

    as market price is greater than strike price, so investor strike the option.

    First Section 5/11


    Case A

    cost = 1, 000 × 26 = (26, 000)


    sale = 1, 000 × 20 = 20, 000
    loss = (6, 000)
    partial profit = 3, 000 [500×(26 − 20]
    Net loss=(3,000)

    First Section 6/11


    Case B

    second case
    Assume Market price Mp =14 after 90 days.

    as market price is not greater than strike price, so investor will not strike the option.

    First Section 7/11


    Case B

    cost = 1, 000 × 20 = (10, 000)


    sale = 500 × 14 = 7, 000
    Net loss=(3,000)
    Theorem (option price)
    so we set option price =3,000

    First Section 8/11


    Other case

    • Market price=25
    • 18
    • 23
    • 10
    • 30

    First Section 9/11


    Case 25

    cost = 1, 000 × 25 = (25, 000)


    sale = 1, 000 × 20 = 20, 000
    loss = (5, 000)
    partial profit = 2, 500 [500×(25 − 20]
    Net loss=(2,500)
    option price=3,000
    Net profit=500

    First Section 10/11


    The End

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