Options using the binomial model with five periods

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Reference no: EM131906076

From Yahoo Finance or any other source choose one in-the-money or at-the-money call and put option and one out-of-the-money call and put option (a total of four options) on IBM stock. Note down the characteristics (strike, maturity etc.) and the prices of the options. Assume these are European options and do the following:

a. Compute the price of the options using the binomial model with five periods. Use 1.27% as the risk-free rate.

b. Compute the price of the options using the Black Scholes model, with the historical volatility (standard deviation) computed above.

c. Compute the percentage error between the option prices calculated above with each of the methods and the actual option prices you found on Yahoo Finance or another source.

Reference no: EM131906076

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