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    Kotra Subhadra Rucha - DRM Presentation

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    The document discusses using binomial trees to value options. Binomial trees break down the valuation process into discrete time periods, provide flexibility, and consider the time value of options. An example is provided to calculate the upward, downward and probability values in a binomial tree to value an option on a foreign currency.

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    Kotra Subhadra Rucha - DRM Presentation

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    Rucha
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    The document discusses using binomial trees to value options. Binomial trees break down the valuation process into discrete time periods, provide flexibility, and consider the time value of options. An example is provided to calculate the upward, downward and probability values in a binomial tree to value an option on a foreign currency.

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    The document discusses using binomial trees to value options. Binomial trees break down the valuation process into discrete time periods, provide flexibility, and consider the time value of options. An example is provided to calculate the upward, downward and probability values in a binomial tree to value an option on a foreign currency.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    11 views4 pages

    Kotra Subhadra Rucha - DRM Presentation

    Uploaded by

    Rucha
    The document discusses using binomial trees to value options. Binomial trees break down the valuation process into discrete time periods, provide flexibility, and consider the time value of options. An example is provided to calculate the upward, downward and probability values in a binomial tree to value an option on a foreign currency.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    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!

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