The task is to numerically value 2 options, one call and one put (European or American) on one of the stocks selected in part 1 by using the binomial lattice framework and comparing the result with the Black-Scholes option valuation method.

1. The options to be valued and the underlying asset is to be selected according to the student’s choice.

2. The two options, one call and one put must have the same strike price and maturity and the maturity must be at least 6 months.

3. Both results obtained using the binomial lattice (15% of the mark) and the Black-Scholes formula (10% of the mark) have to be compared with the market price (5% of the mark).

4. Put-call parity relationship needs to be shown (10% of the mark).

5. The lattice should have at least 200 steps.

6. Sensitivity analysis should be performed (10% of the mark). Submission of Proposal Each student is required to submit a brief outline of the companies and portfolio weights chosen as well as the two options to be analysed in Part 2 before 3 pm December 17th, 2021, in the shared excel sheet. Obtaining approval for the proposal is required to ensure that no single asset is studied by more than one student. You must not start your analytical work for submission until the proposal is approved.

Answer rating: 100% (QA)

ANSWER AND STEP BY STEP EXPLANATION For this task the student will investigate two options one call and one put European or American on a stock select... View the full answer