Option Pricing: A Theoretical as well as Practical View

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Gupta, Devika (2009) Option Pricing: A Theoretical as well as Practical View. [Dissertation (University of Nottingham only)] (Unpublished)

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Abstract

This particular study has been undertaken to form a basis of comparison in the 2 main pricing techniques for options, the Black Scholes model and the Binomial Lattice model. The Black Scholes has been the fundamental model for option pricing but has certain limitations. These limitations of the model have been provided for in the Binomial Tree model. Due to this, the Binomial Tree model is used for valuing American options taking real time market data for a stock option that trades on NASDAQ under the Chicago Board Options Exchange which is then compared to the actual price of the option for that given data. This is done with a view to develop a program that has the ability to calculate the price of an option using real time data as close to the actual market price of the option.

Before comparing the pricing models for options and getting started with the computer programming part of it, it is important to understand options in theory. The research starts with defining options and talking about their various types and features and goes further ahead to examining the pricing models. Volatility is discussed in greater detail and its effect on option prices are observed by varying it in the binomial tree program. The program gives results that fortunately do not differ from the actual option prices too much. So the objective is achieved. Like any other model, this one too has limitations which are also looked into in this dissertation.

The literature, methodology, testing and analysis are all done from the point of view of Computational Finance combined.

Item Type: Dissertation (University of Nottingham only)
Depositing User: EP, Services
Date Deposited: 06 Jul 2010 10:38
Last Modified: 05 Feb 2018 00:00
URI: https://eprints.nottingham.ac.uk/id/eprint/23404

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