Implementation of the Binomial market model
In the following we consider June vanilla options for two stocks: Google Inc or Microsoft.
(a) Use appropriate current Treasury bill data to determine a continuously compounded interest rate suitable to price June options. Note: You need to indicated your sources of data and document your procedure.
(b) Find the historical volatilities ˆσ of the stock estimated from all closing prices of the stock for the last 3 months, 6 months, and 12 months. Notes: You need to indicated your sources and show your computations.
(c) Using an appropriate Binomial model approximation that is consistent with the observed historial volatilities and the observed interest rate of the t-bill, find the price of liquid American and European call or put options of your choice on one of the stocks.