Function File: [AssetPrice, OptionValue] = binprice (Price, Strike, Rate, Time, Increment, Volatility, OptType)
Function File: [AssetPrice, OptionValue] = binprice (Price, Strike, Rate, Time, Increment, Volatility, OptType, DividendRate)
Function File: [AssetPrice, OptionValue] = binprice (Price, Strike, Rate, Time, Increment, Volatility, OptType, DividendRate, Dividend, ExDiv)

Compute American call and put option prices using a binomial tree.

  • Variable: Price The current price of the underlying asset.
  • Variable: Strike The strike price the option is written on.
  • Variable: Rate The risk-free interest rate.
  • Variable: Time The time-to-expiry.
  • Variable: Increment Time increment. Increment is rounded to ensure that Time/Increment is an integer.
  • Variable: Volatility The volatility of the underlying asset.
  • Variable: OptType Option type. 1 = call option, 0 = put option.
  • Variable: DividendRate (Optional, default = 0) Annualized, continuously compounded rate of dividends of the underlying asset.
  • Variable: Dividend (Optional, default = 0) The dividend payment at an ex-dividend date as specified by ExDiv.
  • Variable: ExDiv (Optional, default = 0) A vector used to determine the ex-dividend dates. For each j, ExDiv(j) * Increment is the corresponding dividend date.

Computes the American call and put option prices using the Cox-Ross-Rubinstein binomial tree.

Discrete dividends (i.e. Dividend and ExDiv) have not yet been implemented.

Binomial trees are a particular explicit finite difference method for solving the Black-Scholes equation (see M. Rubinstein. On the relation between binomial and trinomial option pricing models. Journal of Derivatives, 8(2):47-50, 2000), and exhibit linear convergence along with the usual strict stability requirements of an explicit method. The serious practitioner should consider using a more sophisticated method, and use binomial trees only for explanatory or heuristic purposes.

See also: blkprice, blsprice.

Package: financial