CFA Level 2 | Derivatives: Valuing an American Call Option (Binomial Option Pricing Model)

[@andrewgirouard6378]

Taking level 2 today not going to lie for derivatives, fixed income, and complex equity formulas your videos have been the clearest and most effective explanations. These are very helpful I appreciate the videos.

[@FabianMoa]

Hi Andrew, my comment came a bit late but I hope it went smoothly for your exam. Thank you for the feedback! That keeps me going.

[@yyman9100]

Very clear explanation! Good for a quick recap and strengthen understanding after going through the syllabus. Thanks Fabian!

[@sudarshanch3328]

Very good explanation quick review of concept in short time. Thanks Fabian!

[@FabianMoa]

Glad it was helpful!

[@thomaskline6823]

You are a legend ! 👏🏻👏🏻👏🏻👏🏻

[@FabianMoa]

Thanks!

[@ArunKumar-yb2jn]

Well explained

[@priyankamalhotra3409]

well explained

[@kangtoby]

you are my man

[@andreyi3707]

thanks a lot!

[@FabianMoa]

You're welcome, Andrey!

[@Soren9w]

In Australian, we study: S0 -> Su -> Su' -> Suu -> Suu' Sud -> Sud' -> Sd -> Sd' -> Sdu -> Sdu' Sdd -> Sdd' Su = S0 x u; Su' = Su - Div1; Suu = Su' x u; Suu' = Suu - Div2 Sud = Su' x d; Sud' = Sud - Div2 Sd = S0 x d; Sd' = Sd - Div1; Sdu = Sd' x d; Sdu' = Sdu - Div2 Sdd = Sd' x d; Sdd' = Sdd - Div2 Not discount anything to Div0 (the present value of dividend). It moves at each period having dividends, that dividend will be deducted from the price of that step after dividend paying.

[@terrrus]

For short puts or long calls, h is in the denominator. i.e. for -10000p hedge would be 10000/h , where 10000 is position size

[@travelwithruo4875]

Why is the $2.60 dividend only added to the call value in period 1 under early exercise of the American call and not under the European call?

[@jonahlevy3341]

boss man ting

[@priyankamalhotra3409]

if had this been a put option, would we still subtract the present value of dividend from the starting stock price?

[@FabianMoa]

Yes, you would have to do the same but I suspect that if it was a question on American put, they would say that the stock is non-dividend paying

[@priyankamalhotra3409]

@@FabianMoa thanks so much! very helpful!

[@beomkomap]

Hi Sir. Nice video. Your hard work is deeply appreciated. By the way, may I know when you say "Exercise early", does it mean we take dividends first before exercising the call option? THanks

[@FabianMoa]

You exercise the call option and buy the stock, and receive the dividend

[@travelwithruo4875]

Why is the 2.60 dividend only added to the call value under early exercise of the Am call and not under the Eu call?

[@FabianMoa]

Because you will receive the dividend only if the option is exercised in that period