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It is possible to use various finite difference methods for both American and Bermudan options It's an assignment to write such a program in my numerical methods class. While it is also true that the binomial tree model can accommodate discrete dividends, so can these finite difference methods.
Why do you think that binary trees are "more accuratte"? I reverted a change by This is not true. By in large, the binomial model is used by practioners for a variety of reasons, mostly having to do with accuracy. As a developer of quantitative option pricing models, I have a fairly broad exposure to this issue and have yet to come across a serious option trader relying on the Black-Scholes model for actual trading.
I believe most practical binomial models use discrete dividends rather than a continuous dividend yield. Using a continuous dividend yield can result in significant mis-pricing at or near dividend dates. Any objections to changing the formula to reflect this? I would get all my values do up the formula and I realized that binary options pricing black scholes in excel I changed the value for the volatility of the stock the end result did not change at all.
Not even by binary options pricing black scholes in excel lowliest of decimal points. After reducing the formulae for the binomial value and the probability, p, I found out why. Why then, would the formula and the model require so much information if you only really need these three things?
Is there a mistake somewhere in there maybe? I think your approach is a little off - you are using stock price S where you should be using option prices C. Start with two trees, one filled with stock prices Sthe other with option prices C. The stock prices are easy, base node is just S 0.
Next binary options pricing black scholes in excel has Su and Sd. Third step has Suu, S 0 and Sdd, etc. Now, start filling in the option tree from back to front. The last step is also easy, just calculate expiration value of the option for each stock price from the stock tree. Next, go back one time step in the option tree using the binomial formula. However, use the values from the option tree, i. I definitely have been approaching the model in the wrong way.
Thanks for clearing that up for me. But the formula still has that weirdness to it. Again, I would strongly encourage you to get ahold of either of the references I mentioned - going off this article alone is going to be a tough journey.
I've since learned that without any dividends, the above mentioned call values are in fact the same. In section Computer Implementations of this article there is a list of spreadsheets:. Perhaps it works in older Excel versions - IDK this and i can't check.
Maybe this section should be revised? I have no particular issue with discussing the recent paper proving no closed-form solution CFS in the article. However, in order to feature this result should it hold up to scrutiny, no particular doubt that it won't in very first paragraph would require some evidence that the world of quantitative finance has been searching for a closed-form solution to BOPM.
I'm a practitioner in this exact field with too many years of experience to mention and I can't recall reading about anyone ever searching for such a thing. In my experience, it's always been assumed that one didn't exist although I suppose it's nice to know that no-one has wasted their time looking, I guess. I binary options pricing black scholes in excel but such evidence will almost surely have failed to surface given failed attempts of obtaining a closed form solution unless they would come in form of a conclusive proof; such is the result of this paper.
Conceivably, failed attempts would have not been worthy of publications. Additionally, this result cements in an elegant manner your belief that none exists. It should be worthy to be mentioned in the very first paragraph as it highlights BOPMs limitations. In general, Georgiadis in xxrefxx proves binary options pricing black scholes in excel binomial options pricing models do not have closed-form solutions.
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