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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Arbitrage, 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.