Therefore, the Value of two-month European name alternative with a stock price or strike rate of $49 is $2.23.
Calculating Price with the Binomial Model
The fundamental approach of calculating the binomial choice mannequin is to use the same chance each duration for success and failure until the alternative expires. However, a dealer can comprise one of a kind probabilities for each duration primarily based on new statistics received as time passes.
Under the threat neutrality assumption, ultra-modern fair rate of a spinoff is equal to the expected value of its future payoff discounted by means of the chance free rate.
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