On the Robustness of Binomial Model and Finite Difference Method for Pricing European Options

Fadugba, S. Emmanuel and Okunlola, J. Temitayo and Adeyemo, A. Oluwaseyi (2013) On the Robustness of Binomial Model and Finite Difference Method for Pricing European Options. On the Robustness of Binomial Model and Finite Difference Method for Pricing European Options, 2 (2). pp. 5-11. ISSN 2319-4413

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Abstract

This paper presents on the robustness of binomial model and finite difference method for pricing European options. Binomial model can be used to accurately price American style options than the Black-Scholes model as it takes into consideration the possibilities of early exercise and other factors like dividends. Finite difference method is useful to solve partial differential equations and provide a general numerical solution to the valuation problems, as well as an optimal early exercise strategy. The strengths and weaknesses of the methods were considered. Finite difference method is computationally efficient and more accurate than binomial model for pricing European options.

Item Type: Article
Divisions: Faculty of Engineering, Science and Mathematics > School of Mathematics
Depositing User: Mr Tayo Okunlola
Date Deposited: 23 Dec 2014 13:16
Last Modified: 23 Dec 2014 13:16
URI: http://eprints.abuad.edu.ng/id/eprint/13

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