Calculating the Quantitative Effects of Implied Volatility on a Call Nordea Option Contract with One and Two Period Binomial Tree Model

We analyze the implied volatility on a call Nordea option contract with one and two period binomial tree model. We found that the call Nordea option contract is overpriced in the two period binomial tree models than the one period binomial model. The call Nordea option contract show high standard deviation in the two period models. Possible explanations of volatility are bid – ask spreads, transactions costs and leverage. The increased implied volatility of the call option contract is due to the interaction of arbitrageurs and noise traders. In this article we aim to calculate the share price increases and decreases based on the factor given, the payoff of the option in each case and the related standard deviation and the expected value of the option at t = 1 and t = 2 based on the calculated probabilities and the prices of the payoff call options. Finally, we calculate the value of the option today discounted at the given risk-free rate