Binomial model is a powerful technique that can be used to solve many complex option-pricing problems. In contrast to the Black-Scholes model and other option pricing models that require solutions to stochastic differential equations, the binomial option pricing model is mathematically simple. It is based on the assumption of no arbitrage. The assumption of no arbitrage implies that all risk-free investments earn the risk-free rate of return and no investment opportunities exists that requires zero amount of investment but yield positive returns. It is the activity of many individuals operating within the context of financial market that, in fact, upholds these conditions. The activities of the arbitrageurs or speculators are often maligned in the media, but their activities insure that financial markets work. They insure that financial assets such as options are priced within a narrow tolerance of their theoretical values. In this paper we use binomial model to derive the Black-Scholes equation using the risk-neutral expectation formula. We also use binomial model for the valuation of European and American options. Lastly, the primary reason why the binomial model is used is its flexibility compared to the Black-Scholes model and it is also used to price a wide variety of options.
| Published in |
Applied and Computational Mathematics (Volume 3, Issue 6-1)
This article belongs to the Special Issue Computational Finance |
| DOI | 10.11648/j.acm.s.2014030601.14 |
| Page(s) | 18-30 |
| Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
| Copyright |
Copyright © The Author(s), 2014. Published by Science Publishing Group |
American Option, Black-Scholes Model, Binomial Model, European Option
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APA Style
Fadugba Sunday Emmanuel, Ajayi Olayinka Adedoyin, Okedele Olanrewaju Hammed. (2014). Performance Measure of Binomial Model for Pricing American and European Options. Applied and Computational Mathematics, 3(6-1), 18-30. https://doi.org/10.11648/j.acm.s.2014030601.14
ACS Style
Fadugba Sunday Emmanuel; Ajayi Olayinka Adedoyin; Okedele Olanrewaju Hammed. Performance Measure of Binomial Model for Pricing American and European Options. Appl. Comput. Math. 2014, 3(6-1), 18-30. doi: 10.11648/j.acm.s.2014030601.14
AMA Style
Fadugba Sunday Emmanuel, Ajayi Olayinka Adedoyin, Okedele Olanrewaju Hammed. Performance Measure of Binomial Model for Pricing American and European Options. Appl Comput Math. 2014;3(6-1):18-30. doi: 10.11648/j.acm.s.2014030601.14
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Download@article{10.11648/j.acm.s.2014030601.14,
author = {Fadugba Sunday Emmanuel and Ajayi Olayinka Adedoyin and Okedele Olanrewaju Hammed},
title = {Performance Measure of Binomial Model for Pricing American and European Options},
journal = {Applied and Computational Mathematics},
volume = {3},
number = {6-1},
pages = {18-30},
doi = {10.11648/j.acm.s.2014030601.14},
url = {https://doi.org/10.11648/j.acm.s.2014030601.14},
eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.acm.s.2014030601.14},
abstract = {Binomial model is a powerful technique that can be used to solve many complex option-pricing problems. In contrast to the Black-Scholes model and other option pricing models that require solutions to stochastic differential equations, the binomial option pricing model is mathematically simple. It is based on the assumption of no arbitrage. The assumption of no arbitrage implies that all risk-free investments earn the risk-free rate of return and no investment opportunities exists that requires zero amount of investment but yield positive returns. It is the activity of many individuals operating within the context of financial market that, in fact, upholds these conditions. The activities of the arbitrageurs or speculators are often maligned in the media, but their activities insure that financial markets work. They insure that financial assets such as options are priced within a narrow tolerance of their theoretical values. In this paper we use binomial model to derive the Black-Scholes equation using the risk-neutral expectation formula. We also use binomial model for the valuation of European and American options. Lastly, the primary reason why the binomial model is used is its flexibility compared to the Black-Scholes model and it is also used to price a wide variety of options.},
year = {2014}
}
TY - JOUR T1 - Performance Measure of Binomial Model for Pricing American and European Options AU - Fadugba Sunday Emmanuel AU - Ajayi Olayinka Adedoyin AU - Okedele Olanrewaju Hammed Y1 - 2014/10/20 PY - 2014 N1 - https://doi.org/10.11648/j.acm.s.2014030601.14 DO - 10.11648/j.acm.s.2014030601.14 T2 - Applied and Computational Mathematics JF - Applied and Computational Mathematics JO - Applied and Computational Mathematics SP - 18 EP - 30 PB - Science Publishing Group SN - 2328-5613 UR - https://doi.org/10.11648/j.acm.s.2014030601.14 AB - Binomial model is a powerful technique that can be used to solve many complex option-pricing problems. In contrast to the Black-Scholes model and other option pricing models that require solutions to stochastic differential equations, the binomial option pricing model is mathematically simple. It is based on the assumption of no arbitrage. The assumption of no arbitrage implies that all risk-free investments earn the risk-free rate of return and no investment opportunities exists that requires zero amount of investment but yield positive returns. It is the activity of many individuals operating within the context of financial market that, in fact, upholds these conditions. The activities of the arbitrageurs or speculators are often maligned in the media, but their activities insure that financial markets work. They insure that financial assets such as options are priced within a narrow tolerance of their theoretical values. In this paper we use binomial model to derive the Black-Scholes equation using the risk-neutral expectation formula. We also use binomial model for the valuation of European and American options. Lastly, the primary reason why the binomial model is used is its flexibility compared to the Black-Scholes model and it is also used to price a wide variety of options. VL - 3 IS - 6-1 ER -
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