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oBIN( ) Example - American Put Option

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

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