Question

The volatility of a non-dividend-paying stock whose price is $50, is 30%. The risk-free rate is 5%
per annum (continuously compounded) for all maturities. Use a two-step tree to calculate the value of
a derivative that pays off [max (St − 63, 0)]" where is the stock price in six months?

Answer 1

Formula used:-

u=EXP(C5*SQRT(C6))
d=EXP(-C5*SQRT(C6))

p=(EXP(C6*C7)-F4)/(F3-F4)

Option =EXP(-$C$6*$C$7)*((D15*$F$6)+($F$7*D19))

Copied into step 1

Option (s-2) =MAX(E12-$C$4,0)

Copied into other cells of step 2

Stock(up)(s-1)=C16*$F$3

Copied in other upward cells

Stock(down)(s-1)=C16*$F$4

I hope my efforts will be fruitful to you....☺️