FNAN 491 Computational Finance Using Excel and Mathematica
© Problem Set 3: Cox-Ross-Rubinstein Binomial Option Pricing and Implied Volatility
Cox-Ross-Rubinstein Binomial Option Pricing
Using a stock that you chose for Problem Sets 1 and 2, compute the Cox-Ross-Rubinstein Binomial Option Pricing call and put option prices for at or near the money options and for 10 periods. Include the date at which you estimated these values and compare them with the current market options close, bid and ask prices. Use either the finance.yahoo.com option prices or those from the Chicago Board of Options Exchange (CBOE.com). Why are your computations different from the market prices as observed at the time for your strike price? Compare with the Black-Scholes options prices that you computed in Problem Set 2? For your computed options prices what is the quoted implied volatility at your strike price from Yahoo?
Compose the Binomial Tree for the Call and Put Options Using 10 Periods
Show the call and put binomial trees in an Excel spreadsheet. Is early exercise profitable at any period for the call or put?
Implied Volatility: Excel
Using the market options prices at your strike price, compute the implied volatilities for the call options and put options using the Cox-Ross-Rubinstein Binomial Option Pricing model for 10 periods. Use Excel Solver for this exercise as provided in the example Excel spreadsheet on BlackBoard. How do your computations compare with those estimates provided from Yahoo Finance and your estimates from Black-Scholes in Problem Set 2?