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Black-Scholes-Merton and binomial tree
Consider a six-month European call option on a non-dividend-paying stock. The stock price is $30, the strike price is $29, and the continuously compounded risk-free interest rate is 6% per annum. The volatility of the stock is 20% per annum.
a) Value this option using the Black-Scholes formula. Illustrate each step in your calculation.
b) Please use a one-step binomial tree to value this option.
c) Please use a two-step binomial tree to value this option.
d) Compare the results from b) to c) with what you get using the Black-ScholesMerton formula.
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