Alternative Approach for the Derivation of Black- Scholes Partial Differential Equation in the Theory of Options Pricing Using Risk Neutral Binomial Process

Fadugba, S. E. and Okunlola, J.T and Adeyemi, E. I. (2014) Alternative Approach for the Derivation of Black- Scholes Partial Differential Equation in the Theory of Options Pricing Using Risk Neutral Binomial Process. Alternative Approach for the Derivation of Black- Scholes Partial Differential Equation in the Theory of Options Pricing Using Risk Neutral Binomial Process. pp. 662-670. ISSN 2320-0227

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Abstract

This paper presents a risk neutral binomial process as an alternative approach for the derivation of analytic pricing equation called “Black-Scholes Partial differential Equation” in the theory of option pricing. Binomial option pricing is a powerful technique that can be used to solve many complex optionpricing problems. In contrast to the Black-Scholes model and other option pricing models that require solutions to stochastic differential equations, the binomial model is mathematically simple. Binomial model is based on the assumption of no arbitrage. The assumption of no arbitrage implies that all risk-free investments earn the risk-free rate of return and no investment opportunity exists that requires zero amounts of investment but yield positive returns.

Item Type: Article
Divisions: Faculty of Engineering, Science and Mathematics > School of Mathematics
Depositing User: Mr Tayo Okunlola
Date Deposited: 22 Dec 2014 20:29
Last Modified: 22 Dec 2014 20:29
URI: http://eprints.abuad.edu.ng/id/eprint/11

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