Statistic Analysis

You need to price a call and a put on a stock using the seven periods binomial model to be coded in excel. Please use the data corresponding to your group from the following table.
S X T r u d
Group 2 100 95 4 2% 1.05 0.95

The structure of the assignment is:

  1. Explain how increasing the number of periods make the model more realistic?
  2. Explain how the payoffs are calculated at maturity and how the premium at t=0 is obtained? (no need to go into details price by price, just give the overall idea)
  3. A Conclusion where you summarize your point of view from how realistic is the binomial and whether it can be used by traders to value options.

Sample Solution

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