Binomial Trees : Option Pricing Model And The Black Scholes Model
Option Pricing Model and the BlackScholes Model. The Binomial Trees Model
(the CRR binomial trees), proposed by Cox, Ross, and Rubinstein in 1979, is a discrete model which has been proved that it converges to the BlackScholes formula when time increments approach to zero[12]. Because of its flexibility and the ease of computation, it can be used to price the European option as well as American option, while the BlackScholes Model is not pritical in valuation of early exercised options, like American option, for it tends to exhibit systematic empirical biases related to the exercise price, the time to maturity and the variance when used in pricing the American option [? ].
However, both these two methods are under the assumption that investors well know about the underlying asset, for instance in BlackScholes model the stock movements are assumed to follow the lognormal distribution. Besides, for these models, the market is complete without any arbitrage opportunity. All these assumptions conflict to the real world. From this perspective, undoubtedly, implementing Nonparametric
Predictive Inference (NPI) method in the option pricing procedure is reasonable. Since unlike classic method, the CRR binomial trees, the probability of stock up or down movement is constant and precise, the NPI probabilities are in the form of
3
1.1. Imprecise Probability 4 an interval with upper and lower bounds, gained…

The Capital Asset Pricing Model
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1037 Words  5 Pagespassive before nature” when he states, “the world of risk management had vaulted into a new era (Bernstein 316). He discussed the famous and revolutionary BlackScholes model. Within six month of publication of the BlackScholes model, Texas Instruments advertised their BlackScholes handheld calculator in The Wall Street Journal. Shortly, the options trading market would use hedge ratios, deltas, and stochastic differential equations. And again, still discussing financial markets, when he asserts “the…

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The Black And Scholes Model
1357 Words  6 PagesStatement 2: “The Black and Scholes model is an ideal method to value Options” The Black Scholes Merton (BSM) model is the bestknown model for valuing options as it is the original of many option pricing models today (Haug and Taleb, 2009; Le, 2015). Developed in 1973 by Fisher Black, Myron Scholes and Robert Merton, the BSM model is still widely used today as the benchmark for many models and techniques that financial analysts use to analyse and determine the fair prices of given options (Jumarie, 2010)…

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Evaluation of Various Numerical Methods for Option Pricing Model
638 Words  3 PagesIn finance, a derivative is a financial instrument whose value is derived from one or more underlying assets. An option is a contract which gives the owner the right, but not the obligation, to buy or sell the asset at a specified strike price at the specified date. The derivative itself is just a contract between two or more parties. Its value is determined by fluctuations in the value of the underlying asset. This price is chosen so that the value of the contract to both sides is zero at the outset…

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The Black Scholes Option Pricing Theory
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