I would like to ask for explanation of example 12.F in lesson 12.3
u= 1.2, d= .8
Initial stock price is 50, European call with strike 50, r=.06,
The tree is:
50 at time 0, Su=60, Sd=40(period h), Suu= 72, Sud=48, Sdd=32 (period 2h)
Calculate greeks: delta(Su, h), delta(Sd,h) and delta(S,0).
I don't understand why :
The calculation for delta(Su,h) and delta(Sd,h) is based on option payoffs at per (Su-Sd), which is (22-0)/(72-48) and 0/72-48. No probability, no interest rate discount was used (which is the same formula for calculating delta in lesson 4 manual).
But the calculation of delta(S,0) is based on option value C at time h, that was calculated with probability p* and continuous interest discount rate:
Cu = e^(-rh)[p*22 +(1-p)*0] = 11.2195
Delta = (11.2195-0)/60-40
Why not :deta = 60-50/(60-40), same way of calculation as delta(Su,h) and delta (Sd, h)?
Thank for for your explanation :-)
u= 1.2, d= .8
Initial stock price is 50, European call with strike 50, r=.06,
The tree is:
50 at time 0, Su=60, Sd=40(period h), Suu= 72, Sud=48, Sdd=32 (period 2h)
Calculate greeks: delta(Su, h), delta(Sd,h) and delta(S,0).
I don't understand why :
The calculation for delta(Su,h) and delta(Sd,h) is based on option payoffs at per (Su-Sd), which is (22-0)/(72-48) and 0/72-48. No probability, no interest rate discount was used (which is the same formula for calculating delta in lesson 4 manual).
But the calculation of delta(S,0) is based on option value C at time h, that was calculated with probability p* and continuous interest discount rate:
Cu = e^(-rh)[p*22 +(1-p)*0] = 11.2195
Delta = (11.2195-0)/60-40
Why not :deta = 60-50/(60-40), same way of calculation as delta(Su,h) and delta (Sd, h)?
Thank for for your explanation :-)
Greeks for binomial- ASM Maunal 12.3 example 12F