ASM questions 25.5:
We are given a binomial tree of continuously compounded interest rates, which each period as 1 year, and up and down movements have equal probabilities.
Question asks to:
Calculate the price of a 2-year European put option with strike price .92 on a 1 year zero coupon bond.
In the solution, in order to find the interest rate for when the option pays off, they use
-ln .92=.083382.
Why is this used instead of 1-.92 = .08?
We are given a binomial tree of continuously compounded interest rates, which each period as 1 year, and up and down movements have equal probabilities.
Question asks to:
Calculate the price of a 2-year European put option with strike price .92 on a 1 year zero coupon bond.
In the solution, in order to find the interest rate for when the option pays off, they use
-ln .92=.083382.
Why is this used instead of 1-.92 = .08?
Binomial Tree Models for Interest Rates - Finding Strike Price?
