American Journal of Applied Mathematics and Statistics. 2017, 5(2), 62-71
DOI: 10.12691/AJAMS-5-2-4
Application of Generalized Binomial Distribution Model for Option pricing
Bright O. Osu1, , Samson O. Eggege2 and Emmanuel J. Ekpeyong3
1Department of Mathematics, Michael Okpara University of Agriculture, Umudike, Nigeria
2Pope John Paul II Model Secondary School Umunagbor Amagborihitte Ezinitte Mbaise
3Department of Statistics, Michael Okpara University of Agriculture, Umudike, Nigeria
Pub. Date: July 20, 2017
Cite this paper
Bright O. Osu, Samson O. Eggege and Emmanuel J. Ekpeyong. Application of Generalized Binomial Distribution Model for Option pricing.
American Journal of Applied Mathematics and Statistics. 2017; 5(2):62-71. doi: 10.12691/AJAMS-5-2-4
Abstract
In this work, the Generalized Binomial Distribution (GBD) combined with some basic financial concepts is applied to generate a model for determining the prices of a European call and put options. To demonstrate the behavior of the option prices (call and put) with respect to variables, some numerical examples and graphical illustration have been given in a concrete setting to illustrate the application of the obtained result of the study. It was observed that when there is an increase in strike prices, it leads to decrease in calls option price C(0) and increase in puts option price P(0). Decrease in interest rate leads to decrease in calls option price P(0), and increase in puts option price P(0), and decrease in expiration date leads to decrease in calls option price C(0) and decrease in puts option price P(0). It was also found that the problem of option price can be approached using Generalized Binomial Distribution (GBD) associated with finance terms.
Keywords
Generalized Binomial Distribution, European call and put option, portfolio, Stock and Dwass identity
Copyright
This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit
http://creativecommons.org/licenses/by/4.0/
References
[1] | B. Adam (2015). Factors that affect an option’s price, (online) Available at http://the option prophet .com. |
|
[2] | S. Chandral, S. D. A. Mehra and R. Khemchandani (2013). An introduction to Financial Mathematics, pp 49-75, Narosa publishing house, New Delhi. |
|
[3] | F. I. Cheng and C. I. Alice (2010). Application of Binomial distribution to evaluate call option (finance).Springer link,pp1-10. |
|
[4] | J. C. Cox, S. A. Ross and M. Rubinson (1979). Option pricing journal of financial Economics pp1-11. |
|
[5] | L. Diderik. (2011). Financial theory,ECON4510. |
|
[6] | P. Jan, (2012). Stochastic calculus in finance Rostock, pp 25-296. |
|
[7] | A. D. Nyustern (2015). Binomial option pricing and model chapter5 pp1-5, www. stern.nyu.edu/adamodar/pdfiles/.option. |
|
[8] | R. Stockbridge (2008). The distcrete Binomial model for option pricing, program in Applied Mathematics, university of Arizona. |
|
[9] | K. Teerapabolan (2012). A pointwise approximation of generalized Binomial Applied mathematics V0l6. |
|
[10] | N. Teddy (2012). The discrete time Binomial Asset pricing model. Available online. |
|
[11] | K.Teerapabolan, and P. Wongkasem (2008). Approximating a generalized Binomial by Binomial and poisson distribution, international journal of statistics and system. vol 3, pp113-124. |
|