This is a really hard question from my class. I just do not understand the calculating process. Can someone explain to me?

Assignment: Binomial Option Pricing Due: Tuesday, December 4 Include your name and student number This assignment is to be completed using Microsoft Excel. Best practices must always be adhered to: calculations should be performed using cell references and functions only, and should not contain any embedded numbers. 1. Use the binomial valuation method for N = 4 periods to determine the value of an American-style Put option with a striKe price of $45 that expires in 35 days. Note that r = 35/365 years, and h = r/ N is the amount of time (in years) covered by one period. The other relevant data are: Current stock price: 5' Annual riskless interest rate: i Annual volatility: o $42.50 (no dividends) 1.55% 32% ll The values of the parameters u, d, f", and it can be found from the equations: a'/5 =1 ":11: h =fd uc , d u' r r (1+2), 1r "0! Prominently list on your printout the values for these parameters displayed to four decimal places.' Show the networks for the possible realizations for the stock price and the put option, clearly indicating the price of the stock and the value of the put at each node, displayed to four decimal places. 2. Next, provide the respective values (again, to four decimal places) for the components of the duplicating portfolio (the "delta" and the amount of borrowing or lending) at the start of each period. Show that the value of the portfolio at each node matches the option value that you calculated. (There is no need to show that the portfolio subsequently matches the two possible end-of-period option values.) 3. With the relevant data from Part 1, use the Black-Scholes formula to calculate and report the value of an otherwise-similar European-style Call option. From this value, use the European Put-Call Parity relationship to find the value of a European-style Put option with the same terms. Calculate the difference between your put value here and the put value found in Part 1, and provide two explanations of any difference that you nd. The Black-Scholes Model C(S,'r) = S N(d1) PV(K) N(d2) where: S 1 2 111 + 0 T d1=(%a '532=dvr10\/7_r and: PVUC) = Kr"1r when: the current stock price the striKe (exercise) price the timetoexpiration (in years) the risk free annual factor, = (1 + i) the standard deviation of the stock's returns (% / year) the cumulative standard normal probability distribution. Useful Excel Functions zqasxo} ('l e" = EXP(z) = SQRT(z) mar{y, z} = MAX (1;, z) n(z) = LN(z) N(z) = NORM.S.DIST(2,TRUE) The symbol 2 indicates a required argument for the function, and the Excel function includes the "=" sign. Note that the NORA/LS. DIST function with the logical value of TRUE is for the cumulative standard normal distribution (the special case of a mean of zero and standard deviation of one) and only requires two arguments. The Excel function NORM. DIST is more general and requires you to specify values for the mean and standard deviation, and the logical value of TRUE for the cumulative distribution. The N ORMDIS T function can be used in your Black-Scholes calculation instead of NORM. S. DIST but then you will need to input the extra arguments, i.e. NORM.S.DIST(z, TRUE) = NORM.DIST(z, 0,1, TRUE) 2