Options
OP1 One-period binomial pricing
Session timeline
Briefing
Trading30 min
Debrief
The case
A stock at a fixed price, and a bond, a call and a put priced by trading. The stock ends at one of two values.
Objective
Finish with as much wealth as possible. Graded on final wealth.
What it shows
- Binomial pricing: a stock that can only go up or down, and an option priced from that.
- Replicating a call with the stock and the bond.
- Put-call parity as a price check between two options.
Watch out for
- A call and a put priced independently, so that parity fails.
- Short selling is on, so a mispricing can be sold as well as bought.
- Pricing the call without the bond, so the replicating portfolio is never built.
Who takes part
- Trader — every student. Trades BOND, a zero-coupon bond, and C25 and P25, a call and a put at a strike of 25. STOCK is quoted at a fixed price.
Class size
Ten to forty students in one role. The bond and options are priced by the class; below ten there is often no other side.
Concepts
- Option pricing
Roles
Trader
You trade a bond, BOND, a call, C25, and a put, P25, both at a strike of 25.
- The stock, STOCK, is quoted at a fixed price. It ends up or down with even chance.
- Assessed on final wealth.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| STOCK | The stock | Quoted price | Trade it |
| BOND | Zero-coupon bond | Continuous trading | Trade it |
| C25 | Call at 25 | Continuous trading | Trade it |
| P25 | Put at 25 | Continuous trading | Trade it |
In the tracks
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