Document Type

Student Research Paper

Date

Spring 2019

Academic Department

Mathematical Sciences

Faculty Advisor(s)

James Hughes

Abstract

One of the most important aspects of financial options is how they are priced. Although there are a variety of methods for pricing basic financial options, two of the most utilized are the Binomial Option Pricing method and the Black-Scholes Formula. The Binomial Option Pricing method requires the assumption that asset prices only increase or decrease by a certain amount in a time-period. This method also requires the creation of binomial trees to track the asset and option prices. In contrast, the Black-Scholes Formula is a general formula and does not hold the assumption that stocks only go up or down by a certain amount. When looking at more complex exotic options, they are almost always priced via the Black-Scholes Formula. This is partly because the Binomial Option Pricing method is too calculation-heavy; however, through programming languages, such as R, some computations of the Binomial Option Pricing method become more feasible. Due to this, comparisons between these two pricing methods can be made for exotic options.

Notes

Senior thesis.

Download

Included in

Economics Commons

Share

COinS