Two step binomial

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Uploaded by on Jun 11, 2008

Here is an spreadsheet example of pricing a European call option on a stock index (e.g., Dow Jones Utility) with a two step binomial. There are two basic process steps: 1. Build forward the "tree" of asset prices, 2. Then backward induction: value the option at each node as the PROBABILITY-adjusted, discounted value of nodes after it.

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Education

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  • david, u should get as much credit as sal khan. u r god.

  • doing this right now!!! in exam on Thursday......

  • The option gonna be exercised in 0.25 year or 3 months, we don't need the price at t=0.5, you overpriced the option. Change the exercised date to 0.5 to make this whole thing right.

  • what is the a?

  • David..You Rock Man!! My FRM Guru :)

  • @humayunrali i guess its just a rounding up error.

  • god bless you, david! :)

  • Calculation at node 2 is not adding up, kindly check the formula.

    Regards

  • Thank you! You've saved me. My exam is tomorrow and I can work through these problems now.

  • hi... good one... can you kindly upload the xls file as well

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