• C++ Programming for Financial Engineering
    Highly recommended by thousands of MFE students. Covers essential C++ topics with applications to financial engineering. Learn more Join!
    Python for Finance with Intro to Data Science
    Gain practical understanding of Python to read, understand, and write professional Python code for your first day on the job. Learn more Join!
    An Intuition-Based Options Primer for FE
    Ideal for entry level positions interviews and graduate studies, specializing in options trading arbitrage and options valuation models. Learn more Join!

Calculating option price from interest rate binomial tree

Franjey

Joined
9/3/18
Messages
2
Points
11
I need help resolving the following exercise, that is computing the option price from an interest rate binomial tree:

The following interest rate binomial tree is provided:
1536019448611.png


Consider the risk-neutral probability = 1/2 (constant through all periods) and delta = 1, then:
1536019499962.png


What is the value of this option? Answer is 0.1532, but I don't know how to get there.

For reference, discount factors for i = 0, i = 1 and i = 2 are:
Z(0,1)=0.9608
Z(0,2)=0.9141
Z(0,3)=0.8659

Will appreciate help.
 
Last edited:
Back
Top