R: Binomial option pricing model

BOPM {QFRM}

R Documentation

Binomial option pricing model

Description

Compute option price via binomial option pricing model (recombining symmetric binomial tree). If no tree requested for European option, vectorized algorithm is used.

Usage

BOPM(o = OptPx(), IncBT = TRUE)

Arguments

`o`	An `OptPx` object
`IncBT`	Values `TRUE` or `FALSE` indicating whether to include a list of all option tree values (underlying and derivative prices) in the returned `OptPx` object.

Value

An original OptPx object with PxBT field as the binomial-tree-based price of an option and (an optional) the fullly-generated binomial tree in BT field.

IncBT = FALSE: option price value (type double, class numeric)
IncBT = TRUE: binomial tree as a list (of length (o$NSteps+1) of numeric matrices (2 x i)

Each matrix is a set of possible i outcomes at time step i columns: (underlying prices, option prices)

Author(s)

Oleg Melnikov, Department of Statistics, Rice University, Spring 2015

References

Hull, J.C., Options, Futures and Other Derivatives, 9ed, 2014. Prentice Hall. ISBN 978-0-13-345631-8, http://www-2.rotman.utoronto.ca/~hull/ofod. http://amzn.com/0133456315

#See Fig.13.11, Hull/9e/p291. #Create an option and price it o = Opt(Style='Eu', Right='C', S0 = 808, ttm = .5, K = 800) o = BOPM( OptPx(o, r=0.05, q=0.02, vol=0.2, NSteps=2), IncBT=TRUE) o$PxBT #print added calculated price to PxBT field

#Fig.13.11, Hull/9e/p291: o = Opt(Style='Eu', Right='C', S0=810, ttm=.5, K=800) BOPM( OptPx(o, r=0.05, q=0.02, vol=0.2, NSteps=2), IncBT=TRUE)$PxBT

#DerivaGem diplays up to 10 steps: o = Opt(Style='Am', Right='C', 810, .5, 800) BOPM( OptPx(o, r=0.05, q=0.02, vol=0.2, NSteps=20), IncBT=TRUE)

#DerivaGem computes up to 500 steps: o = Opt(Style='American', Right='Put', 810, 0.5, 800) BOPM( OptPx(o, r=0.05, q=0.02, vol=0.2, NSteps=1000), IncBT=FALSE)