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oBIN2( ) Example - Bermudan Put Option

Description

Consider a Bermudan put option on a dividend paying stock. The current stock price is $45, the option strike price is $44, the riskless rate is 5% (expressed on an actual/365 basis), and the option maturity date is 30 December 2003. What is the value of the option assuming a valuation date of 15 February 2003, and the schedule of exercise dates and dividend payments displayed below?

 

 

Exercise Dates

Div Pay Date

Dividend

 

 

.

 

 

 

 

30/4/2003

30/5/2003

$0.75

 

 

30/5/2003

30/11/2003

$0.75

 

 

30/6/2003

 

 

 

 

30/7/2003

 

 

 

 

30/8/2003

 

 

 

 

30/9/2003

 

 

 

 

30/10/2003

 

 

 

 

30/11/2003

 

 

 

 

30/12/2003

 

 

 

 

 

 

 

 

Function Specification

=oBIN2(2, 3, "15/2/03", "30/12/03", 45, 44, 0.25, 0.05, D5:E6, F5:F13, 200, 0)

 

 

 

Parameter Name

Parameter Value

 

 

.

 

 

CallPut

2

 

 

Exercise Style

3

 

 

Value Date

15/2/03

 

 

Maturity Date

30/12/03

 

 

Spot

$45

 

 

Exercise

$44

 

 

Volatility

0.25

 

 

Risk Free

0.05

 

 

Dividends

D5:E6

 

 

Exercise Dates

F5:F13

 

 

Steps

200

 

 

Output Flag

0

 

 

 

Where the cell range D5:D6 contains the dividend schedule, and the cell range F5:F13 contains the exercise date schedule.

 

Solution

Because this option has a Bermudan exercise style, the most appropriate valuation approach is supported by the oBIN2( ) function. Applying the function specification as given above with 200 time steps, the return results are as follows:

OV = $3.389682

 

Greeks

The following Greeks are computed using the formulas specified in oBIN( ) Model Greeks:

Delta

-0.407680

Gamma

0.039189

Theta

-1.273586

Vega

15.699351

Rho

-15.563895

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