Calculate the value of the option using the binomial model

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Reference no: EM131488071

Assignment 1 - Convertible Bond Exercise

Download the Convertible Bonds Excel file.

Use the following inputs as the base case:

Coupon	5.000%
Maturity	20
Yield	8.000%

Stock Price	47.000
Volatility	35.00%
Risk Free	3.00%
Conversion	55.000
Steps per period	12
Conversion Percent	95.00%
No Call	2

Find the price of the convertible bond and the value of the embedded option.

The Greeks -

The Greeks measure price sensitivity to changes in the inputs. They can be estimated as follows. Suppose that P(x) is a formula that finds the price of a security for an input value of x, with all of the other inputs using the given values. Then, the sensitivity to x when x = x₀ can be estimated as follows:

P(x₀ + Δx) - P(x₀ - Δx)/2Δx

Delta (Δ) measures sensitivity to changes in asset price (x=S). Vega (v) measures sensitivity to changes in volatility (x=σ). Rho (ρ) measures sensitivity to changes in interest rates (x=r_f).Find the Delta, Vega and Rho for this convertible bond. For your calculations, use the following:

Greek	Change in Input
Delta (Δ)	$0.25
Vega (v)	0.25%
Rho (ρ)	0.10%

For the Rho calculations, don't forget to change both the Risk Free rate and the Yield by the change in rates.

In addition, find the Effective Duration (D_eff). This is equal to the percent change in price for a small change in yield. You can calculate it using the following;

D_eff = -(ρ/Bond Price)

Repeat the process for asset prices equal to $15 and equal to $85.

Write a memo (maximum of two pages, not including cover page, tables and charts) showing your results (in tables) and discussing your results. Hand in a hard copy in class.

Assignment 2 - Cash or Share

On the midterm, I asked you to think about how you would calculate a Cash or Share Optio.

A Cash or Share Option is a European option. The seller must pay the strike price in cash if the underlying asset is above the strike price and must deliver one share of the stock otherwise. Suppose that you know the following:

Price	$35.00
Strike	$40.00
Time	0.5 years
Volatility	45%
Risk Free Rate	2.5%
Number of steps	100

Write a VBA program to calculate the value of the option using the Binomial model.

Reference no: EM131488071

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