人民银行版金融衍生工具讲义（英文）-Lecture8.ppt

Lecture 8: Binomial Option Pricing We have derived upper and lower bounds for options by using simple no arbitrage arguments. Although these bounds limit the price of the option, the difference of the upper and lower bounds can be quite large. For example, consider a European call option with strike price of 100, maturity date in six months, and where the underlying asset price is 100. We know the option price must be in the range of 2.96 and 100, assuming the interest rate of 6%. To price options more precisely, we must make additional assumptions about the probability distribution describing the possible price changes in the underlying asset. The purpose of this lecture is to study a model of asset price. ·??????? Basic assumptions 1.???? Assume that the stock price can take one of two possible values at the end of one period. 2.???? There exists a risk-free security 3.???? There are no arbitrage opportunities 4.???? There is no interest rate uncertainty ·??????? The importance of binomial price model 1.???? It yields important insights into the pricing and hedging all derivatives. 2.???? The basic logic of this approach is similar to the logic of the majority derivative security models in use today. 3.???? If short rate is a constant, under some conditions, the binomial model of stock price will converge to the stock price dynamics used to drive Black-Scholes option pricing formula. 4.???? Binomial tree can be used to model stock price dynamics when the volatility is a function of stock price. 5.???? In the practice, a binomial tree may be estimated or constructed based on simple options (implied binomial tree) and then it is used to price exotic options. 6.???? In numerical analysis, binomial tree approach is one of the most important tools. ·??????? General assets pricing methods 1.???? General equilibrium approach: it is used to price basic assets. You have to consider investors/consumers utility functions, producers production functions. The asset price