A Binomial Tree to Price European and American Options

Brogi, Athos (2016): A Binomial Tree to Price European and American Options.

Abstract

A martingale pricing changing volatility binomial tree modeling the negative correlation between returns and volatility is presented and implemented. Matlab code implementing the tree is provided, as well as pricing examples and performance.

• Item Type: MPRA Paper
• Language: English
• Keywords: Arbitrage, calibration, kurtosis, martingale, option, risk-neutral, skewness, volatility
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

References

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Brogi A. (2014) A Binomial Tree to Price European Options, MPRA Paper No. 55681.

Cox J. C., Ross S. A., and Rubinstein M. (1979) Option Pricing: A Simplified Approach, Journal of Financial Economics, 7, 229-263.

Haug E. G. (2007) The Complete Guide to Option Pricing Formulas, Second Edition, McGraw-Hill.