Derivative Markets 2nd Edition Robert L.Mcdonald 原版课件_CH10.ppt

Ch10 Chapter 10 Binomial Option Pricing: I Introduction to Binomial Option Pricing Binomial option pricing enables us to determine the price of an option, given the characteristics of the stock or other underlying asset The binomial option pricing model assumes that the price of the underlying asset follows a binomial distribution—that is, the asset price in each period can move only up or down by a specified amount The binomial model is often referred to as the “Cox-Ross-Rubinstein pricing model” A One-Period Binomial Tree Example Consider a European call option on the stock of XYZ, with a $40 strike and 1 year to expiration XYZ does not pay dividends, and its current price is $41 The continuously compounded risk-free interest rate is 8% The following figure depicts possible stock prices over 1 year, i.e., a binomial tree $60 $41 $30 Computing the Option Price Next, consider two portfolios Portfolio A: buy one call option Portfolio B: buy 2/3 shares of XYZ and borrow $18.462 at the risk-free rate Costs Portfolio A: the call premium, which is unknown Portfolio B: 2/3 ? $41 – $18.462 = $8.871 Computing the Option Price (cont’d) Payoffs: Portfolio A: Stock Price in 1 Year $30.0 $60.0 Payoff 0 $20.0 Portfolio B: Stock Price in 1 Year $30.0 $60.0 2/3 purchased shares $20.000 $40.000 Repay loan of $18.462 – $20.000 – $20.000 Total payoff 0 $20.000 Computing the Option Price (cont’d) Portfolios A and B have the same payoff. Therefore Portfolios A and B should have the same cost. Since Portfolio B costs $8.871, the price of one option must be $8.871 There is a way to create the payoff to a call by buying shares and borrowing. Portfolio B is a synthetic call One option has the risk of 2/3 shares. The value 2/3 is the delta (?) of the option: The number of shares that replicates the option payoff A One-Period Binomial Tree Ano