Pricing Models for Financial Options
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Sunayan Acharya
Presentation Format
Event
Abstract/Description
Financial options are contracts often used as tools for hedging a position on fluctuating stock prices. There is no closed form solution for the pricing of these options; however, there exist certain numerical techniques to price them. For this paper, I implemented binomial and trinomial probability models to price a total of twenty-four different types of options, using MATLAB to code the pricing algorithms. The probability-based pricing system starts with the creation of a lattice for the tree of possible stock prices, then works recursively from the far end of the tree (the end of a user-specified time period) to reach a single price value at the time of the option’s purchase. There was also an investigation into simplicity (measured in time taken for the computer to reach the option price) versus accuracy (measured in difference in price from some benchmark, more accurate value) as the number of steps of the stock tree increased.
Location
Barkley Room, Curris Center
Start Date
April 2016
End Date
April 2016
Affiliations
Honors Thesis
Pricing Models for Financial Options
Barkley Room, Curris Center
Financial options are contracts often used as tools for hedging a position on fluctuating stock prices. There is no closed form solution for the pricing of these options; however, there exist certain numerical techniques to price them. For this paper, I implemented binomial and trinomial probability models to price a total of twenty-four different types of options, using MATLAB to code the pricing algorithms. The probability-based pricing system starts with the creation of a lattice for the tree of possible stock prices, then works recursively from the far end of the tree (the end of a user-specified time period) to reach a single price value at the time of the option’s purchase. There was also an investigation into simplicity (measured in time taken for the computer to reach the option price) versus accuracy (measured in difference in price from some benchmark, more accurate value) as the number of steps of the stock tree increased.