CFA L2- Risk Neutral Probability- Binomial Option Pricing Model

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This video was captured during a live session by Utkarsh Jain in one of the session of in CFA level II class in Pune.

[@Gangsta_babe]

I feel so grateful for geniuses like you. If it wasn't for you , i wouldn't have completed probability concepts. All the tricks you uploaded has tremendously helped me to solve curriculum questions. For Level II i'm joining Fintree, cuz I've already wasted my money with another institute for level 1(i can't afford to spend more). Thanks again, you are an angel!

[@bannistersportstephens457]

Thank you for this video. I was struggling to work out the probability of the 'up' and 'down' states to determine the call price on an option.

[@mayankkumar-mg9ig]

If I assume continuous compounding and proceed
At 1:45, while calculating probability
p= (e^(.1) -.8)/(1.15 -.8)= .871423 , q= 1-p= .128577
At 2:24, value of call option= (25*.871423+.128577*0) /e^(.1)= INR 19.7124
Amount invested originally = 714*1000- 1000*197124= INR 51688
At 7:45, If I invest amount INR 51688 in government bonds or FD at 10% RFR for 1 yr then
51688*e^(.10*1)= INR 57124 which is not equivalent to weight-age average (.871423*57110+.128577*57120= INR 57111)
but 57124 not equal 57111 .
Where conceptually I went wrong ? Does assuming continuous compounding is wrong in risk neutral probability ?

[@kshipradesai1549]

You make every concept so easy to understand. Thanks.

[@Lukas-cm2b]

this is the second video on on this topic i seen that is incorecctly omputing the loss for case a). you have to add 100x multiplier for the 25 loss

[@abditajirhassan3447]

How do we calculate the put option when told to use the binomial tree in this same question.

[@peterkuzmin8624]

Thanks for explaining how to use a formula...

[@salomijoseph5268]

Why r we short selling 1000 ?

[@seineyumnam4374]

if you ar selling 1000 calls and buy 714 shares, that is not delta neutral. 714 is for only 10 calls since one call represents 100 shares.

[@ArunKumar-yb2jn]

Makes sense.

[@simonbc441]

What language is this?

[@sumerbajaj]

Very poor explanation.. you should show the discounting part to reach from current probability to risk neutral probability.. why one have to go through entire 2 time pricing to get this.

[@abhishekbal399]

I know he is poor in explanation because his own concepts are weak.

[@TapiwaChikudza]

thats good