Question Calculate the normal distribution and cumulative distribution for d ranging from -5 to +5 in increments
Question:
Question
Calculate the normal distribution and cumulative distribution for "d" ranging from -5 to
+5 in increments of 0.2. Assume the distribution is standard normal (mean = 0, variance
=1). Using a scatter graph, plot both series on the same graph.
Question
Assume the following information:
Exercise price (X) = $21
Risk-free rate (r) = 10%
S0 = $20
U = 1.2
P = .81
It might be helpful to use the BINOMDIST command in Excel.
(a) Calculate the price of a call option using the binomial tree method using 2,4 and 6
time periods. What happens as the number of time periods increases? Why?
(b) Recalculate the call prices assuming p= .5
(c) What are the differences in you results? Interpret them.
(d) What happens as you increase the strike price to $30? Does this fit with option
theory?
(e) Assume the original set of information but increase the volatility, i.e. let U=1.5 and
D=.67. What happens to the price of the call option? Does this conform with option
theory?
(f) Calculate the value of a put option using risk-neutral probability.
(g) Verify parts (f) and (g) using put-pall parity.