Dear Patrick, It looks like I have been commenting your videos too often these days, but believe me, this is only my 2nd comment in 2 days :D I just wanted to point out that we could also find the fair value or risk free value of the put option without going through all the steps. I will start by calculating the risk neutral probabilities at the extremities of the tree using the binomial theorem. I find p^2, p-p^2 and (1-p)^2 at uu, ud, and dd respectively. I then calculate p using your same method applying a discount factor of e^(0,05) when plugging numbers into the formula e^(rt) - d/ u-d. I then calculate calculate directly 'f' by multiplying sigma of these risk neutral probabilities (p^2, p-p^2 and (1-p)^2) I would be very grateful if could please confirm me that this approach is right and that my choice of the discounting factors is also right, both when calculating p and when calculating f. Thank you very much for your support! I hope you can keep on uploading videos like this!
thank you, your video is quite useful, i am struggling to calculate 20 steps European put option price, six-month maturity, i want to know the time period for daily stock price data i need to calculate volatility? and any tips for performing 20 steps using spreadsheet?
Hi Ali, If it is a 20 step 6 month tree, each step is 1/20th of 6 months. On the topic of calculating volatility, watch this video starting at around 11 minutes and 50 seconds. czcams.com/video/0leY0fVCVy8/video.html
@@PBoyle , Thank you very much for the explanation on volatility! I went through a lot of sites and videos about option modal, and most of them just quickly brush through the volatility. I think you explained it perfectly!
Hi Patrick! Quick question about U and D -in your initial, examples, you had the price rising and falling by an equal amount, 20% each. This makes intuitive sense to me assuming price follows a random walk... However, the calculation for U and D that I find everywhere (including at the end of this video) shows U and D being reciprocal, which would result in the move of one side being greater than the other. I can't find an answer to why this is.. so I imagine I'm missing some fundamental concept. Can you explain, or point me toward a resource (preferably one of yours) which would help me understand why, for example, the U move is calculated to be greater than the D move? Thanks for the time and effort in your content. Also thanks for covering the guitar center story! Was delighted to see that.
Might be a touch late on this for you (and also not necessarily correct) But if a start value is 100 and then we scale up by 20% and then down by 20% we get 100 x 1.2 x 0.8 = 96 Where as if multiply by the u and then d, where d is defined as (1/u) then we see that we get 100 x u x (1/u) = 100. So we actually get a bias if we don't use the reciprocal approach!
I can't help but laugh every time you say Fu with a straight face...😂 Great video though this series is saving my MBA academic career.
Dear Patrick,
It looks like I have been commenting your videos too often these days, but believe me, this is only my 2nd comment in 2 days :D
I just wanted to point out that we could also find the fair value or risk free value of the put option without going through all the steps.
I will start by calculating the risk neutral probabilities at the extremities of the tree using the binomial theorem. I find p^2, p-p^2 and (1-p)^2 at uu, ud, and dd respectively. I then calculate p using your same method applying a discount factor of e^(0,05) when plugging numbers into the formula e^(rt) - d/ u-d.
I then calculate calculate directly 'f' by multiplying sigma of these risk neutral probabilities (p^2, p-p^2 and (1-p)^2)
I would be very grateful if could please confirm me that this approach is right and that my choice of the discounting factors is also right, both when calculating p and when calculating f.
Thank you very much for your support! I hope you can keep on uploading videos like this!
Hi Patrick! Quick question, the closer you get to the expiration of the option do you also have to recalculate for each branch (e^rt-d)/(u-d)?
thank you, your video is quite useful, i am struggling to calculate 20 steps European put option price, six-month maturity, i want to know the time period for daily stock price data i need to calculate volatility? and any tips for performing 20 steps using spreadsheet?
Hi Ali, If it is a 20 step 6 month tree, each step is 1/20th of 6 months. On the topic of calculating volatility, watch this video starting at around 11 minutes and 50 seconds. czcams.com/video/0leY0fVCVy8/video.html
@@PBoyle Thank you Patrick , thats very helpful
@@PBoyle , Thank you very much for the explanation on volatility! I went through a lot of sites and videos about option modal, and most of them just quickly brush through the volatility. I think you explained it perfectly!
Hi Patrick! Quick question about U and D
-in your initial, examples, you had the price rising and falling by an equal amount, 20% each. This makes intuitive sense to me assuming price follows a random walk...
However, the calculation for U and D that I find everywhere (including at the end of this video) shows U and D being reciprocal, which would result in the move of one side being greater than the other.
I can't find an answer to why this is.. so I imagine I'm missing some fundamental concept. Can you explain, or point me toward a resource (preferably one of yours) which would help me understand why, for example, the U move is calculated to be greater than the D move?
Thanks for the time and effort in your content. Also thanks for covering the guitar center story! Was delighted to see that.
Might be a touch late on this for you (and also not necessarily correct)
But if a start value is 100 and then we scale up by 20% and then down by 20% we get 100 x 1.2 x 0.8 = 96
Where as if multiply by the u and then d, where d is defined as (1/u) then we see that we get 100 x u x (1/u) = 100.
So we actually get a bias if we don't use the reciprocal approach!
@@JoeeOSullivan It's true that Dinasaurs extincted billions of years ago... Sorry for the distraction from the topic😄😄😄
I remember there is a video that explain why amarican option is more expensive than european option. But could not find now
I think it is this one. czcams.com/video/pkuQLFI13Ws/video.html
This one might be helpful too czcams.com/video/Os4xRY51xh4/video.html