Description

Consider an American put option on a non-dividend paying stock. The current stock price is $32, the option strike price is $30, the riskless rate is 4.25% (expressed on an actual/365 basis), annualized volatility is 30%, and the option maturity date is 15 December 2003. What is the value of the option assuming a valuation date of 15 February 2003?

Function Specification

=oBIN(2, 2, "15/2/03", "15/12/03", 32, 30, 0.3, 0.0425, 0, 200, 0)

Parameter Name

Parameter Value

.

CallPut

2

Exercise Style

2

Value Date

15/2/03

Maturity Date

15/12/03

Spot

$32

Exercise

$30

Volatility

0.30

Risk Free

0.0425

Dividend Yield

0

Steps

200

Output Flag

0

Solution

Given that the underlying stock does not pay a discrete dividend during the life of the option, this option can be valued using a binomial tree model with constant timesteps. If we build a tree with 200 timesteps, the oBIN( ) function returns an option value of:

OV = 2.3969

Greeks

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

Delta

-0.3458975

Gamma

0.0419041

Theta

-1.8317323

Vega

10.622727

Rho

-1.508379