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Why they have calculated pv of 28 ?
If we have to calculate present value of option then we should have calculated present value of 24 m bcoz this will be exercisable after 2 year and then we should have calculated present value.
Please explain me this.No we shouldn’t have calculated the PV of 24m.
In the formula we multiply Pe by N(d2)e^(-rt). The e^(-rt) is there to do the discounting on a continuous (day by day) basis (rather than in whole years as we usually do) and so we do not need to discount it again.
Also in c part in answer they have written binomial option pricing model, what it is?
The 28M has not been discounted – it is simply multiplied by N(d1). It is only the 24M that has been discounted by multiplying by. e^(-rt) as I explained before.
Have you actually watched my free lectures on option pricing and on real options?
The binomial option pricing model is an alternative to the Black Scholes model, but it is not in the syllabus and you cannot be expected to mention it.
The examiners answer at the time mentioned it as the last line of his answer (and if you are looking at it in a Revision Kit they simply copy out the examiners answer). However there were no marks on the marking scheme for mentioning it – the examiner at the time was just being clever, but that examiner was removed over 10 years ago and replaced with the current examiner.
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