Financial Modeling
You should submit an excel spreadsheet with 2 worksheets for each of the 2 questions. Your worksheets must include the steps and functions for the calculations.
Question 1:
Please use binomial option pricing model to find the price of the put option. The put option matures in a year and has exercise price $30. The price of the underlying stock is $30 today. At the end of the year, the stock price could be either $35 or $25. The interest rate on the risk-free asset is 5% per year. (Hint: Use the stock and the risk-free asset to replicate the payoff of the put option)
Question 2:
Please find the price of the put option using the simulated stock prices. The put option matures in 1 year and has exercise price $30. The price of the underlying stock is $30 today. The average annual stock return is 5%. The annualized stock volatility is 15%. The interest rate on the risk-free asset is 5% per year. Please simulate the end of year stock price for 1000 times.
