Pricing Options Using Trinomial Lattice Method
| Autor: | George Korir Kiprop, Joseph Ivivi Mwaniki, Kenneth Kiprotich Langat |
|---|---|
| Rok vydání: | 2019 |
| Předmět: |
040101 forestry
Option contract 0211 other engineering and technologies 021107 urban & regional planning 04 agricultural and veterinary sciences 02 engineering and technology Black–Scholes model Trinomial tree Trinomial Stock exchange Economics 0401 agriculture forestry and fisheries Finite difference methods for option pricing Binomial options pricing model Put option Mathematical economics |
| Zdroj: | Journal of Finance and Economics. 7:81-87 |
| ISSN: | 2328-7284 |
| DOI: | 10.12691/jfe-7-3-1 |
| Popis: | How much to spend on an option contract is the main problem at the task of pricing options. This become more complex when it comes to projecting the future possible price of the option. This is attainable if one knows the probabilities of prices either increasing, decreasing or remaining the same. Every investor wishes to make profit on whatever amount they put in the stock exchange and thus the need for a good formula that give a very good approximations to the market prices. This paper aims at introducing the concept of pricing options by using numerical methods. In particular, we focus on the pricing of a European put option which lead us to having American put option curve using Trinomial lattice model. In Trinomial method, the concept of a random walk is used in the simulation of the path followed by the underlying stock price. The explicit price of the European put option is known. Therefore at the end of the paper, the numerical prices obtained by the Black Scholes equation will be compared to the numerical prices obtained using Trinomial and Binomial methods. |
| Databáze: | OpenAIRE |
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