Binomial option pricing

 

1. Introduction

The derivation of the Black-Scholes equation is described elsewere (see e.g. the links below). Here I implemented the solution for option pricing as a Windows program.

In [1] L. Wu extremely clear presented three approaches to option valuation using binomial trees:

1. Delta hedging
2. Portfolio replication
3. Risk-neutral valuation

I also used Refs [2] and [3].

Program

 I implemented the binary tree algorithm using my libraries.

Info

 

Prices	Plots

Feel free to download and play (at your own risk ).

I am adding several new features, please check later.

 

Downloads

Binomial option pricing (zipped exe).

Source code (Delphi 7 and up).

 

References

1. Binomial Trees, by Liuren Wu. http://faculty.baruch.cuny.edu/lwu/890/890Lec4.pdf
2. Jouni Kerman, Numerical Methods for Option Pricing: Binomial and Finite-difference Approximations.
3. P. Wilmott, S. Howison, J. Dewynne. The mathematics of financial derivatives (Cambridge, 1996).

 

Links

• Gunter Meyer http://www.math.gatech.edu/~meyer/
• Numerical Methods in Finance http://www.math.gatech.edu/~meyer/MA6635/
• Pricing American Options by Adaptive Finite Element Method http://www.math.umd.edu/research/spotlight/options.pdf
• Monte Carlo Methods for American Options http://www.informs-cs.org/wsc04papers/219.pdf
• How American Options are Exercised http://www.business.uiuc.edu/poteshma/research/duffieLiuPoteshman.pdf
• Pricing European and American Options with Extrapolation http://www.csie.ntu.edu.tw/~lyuu/theses/thesis_r90723064.pdf
• Knock-in American options http://www.math.nus.edu.sg/~matdm/jfm.pdf
• Binomial Option Pricing, the Black-Scholes Option Pricing Formula http://finance.wharton.upenn.edu/~benninga/mma/MiER64.pdf
• Binomial model http://web.am.qub.ac.uk/users/m.s.kim/chap3.pdf
• Binomial Trees for the Short Rate http://www.stat.purdue.edu/~kvp24/project598g.pdf
• Nine Ways to Implement the Binomial Method for Option Valuation in MATLAB http://www.maths.strath.ac.uk/~aas96106/39326.pdf
• Binomial Trees for the Short Rate http://www.stat.purdue.edu/~kvp24/project598g.pdf
• Binomial model http://web.am.qub.ac.uk/users/m.s.kim/chap3.pdf
• Option calculator: http://www.ramasoft.hu/option_calculator_binomial_model.shtml
• Call-Put parity http://som.gmu.edu/sba/putcallp/putcallp.ppt
• Arbitrage Relationship for American Options http://www.quantlet.de/mdstat/scripts/sfe/html/sfenode40.html