Question

please draw a one step binomial tree to price a European call option with the following parameters: the time t =1 refers to one year Inputs: s = 50, k = 50, t = 1, v = 0.5, r = 0.05, y = 0, n = 1

please show how the answer is 13.17 using the Cox Ross & Rubinstein binomial tree model

Answer 1

Using given data ,

S	$                 50.00	current share price
r	5%	risk free rate p.a.
s (sigma)	50%
u	1.649	u = EXP(s*dT^0.5)
d	0.607	d = EXP(-s*dT^0.5)
X	$                 50.00
T	1
n	1
dT	1	dT = T / n
p	0.4267	p = [ exp(rDT) - d ] / (u -d)