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Attached is our Excel Sheet, a picture with annotations, and the assignment work
Attached is our Excel Sheet, a picture with annotations, and the assignment worksheet to submit. I played the assignment with two students and they thought it was self-evident.
The subject of “financial derivatives” is an important topic conceptually and quantitatively. Some instruments are very complex but a base understanding is not. That is my objective for you with this exercise.
I think the Benny book does a nice job explaining the use of and computations. I’s suggest you read 361 to 368 in Ver 4 and 437 to 445 in Ver 5. The balance of the chapter Benny describes trading strategies but that is not my intention to teach. For those of you super-duper interested in options you will want to study the Black –Scholes model – see chapter 17 or 18.
I have created this worksheet to simplify the computations. We are only concerned with the mechanics and valuation of a call using a simplified binomial option pricing model. Benny writes about this is in the suggested readings. We are doing a 3 period model. The more branches and shorter the time periods, the better the model is recognized to be. If you can do a 3 period model you can do a more expansive model. I have a file on my computer of a 500 branch model – not made by me or Kingman. I think it was a prison inmate with nothing else to do.
View the visual, play the game as instructed in the worksheet doc, complete the worksheet doc and sim file and submit to Canvas.
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