Derivative Pricing and Valuation
Numerically evaluate the call and put option prices, both European and American, on an underlying stock index asset by using the lattice framework.
Each student is required to select a company listed on a global exchange, which has a five–year history of daily market share price data and at least since January 1st 2022 market data on call and put options. Information on share and option data is accessible through Bloomberg.
The selected company and the origination date for evaluating the option value must
be registered1. Although it is acceptable that more than one student may select the
same company, the origination dates must be different.
You are required to complete the following:
1. Use the daily market data to statistically evaluate the historical volatility for
the share price. Collect information on the company’s annual dividend paid
and assess its dividend yield. For your chosen origination date, collect data
on the annual interest rate for various expiration dates.
2. Evaluate the option premiums, call and put, European and American, based on a binomial lattice framework. Compare your results with the given European option price, examine the effectiveness of your selected method,
and make improvements where necessary.
3. Report the Greeks and perform any sensitivity analysis.
4. Derive the American put exercise boundary.
5. Extend your analysis to more complex exotic option