Options evaluation - Black-Scholes model vs. binomial options pricing model

Ioan Trenca, Maria Miruna Pochea and Angela Maria Filip
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Angela Maria Filip: Babes-Bolyai University Cluj-Napoca

Finante - provocarile viitorului (Finance - Challenges of the Future), 2010, vol. 1, issue 12, 137-146

Abstract: A huge number of financial institutions and companies use the options in risk management. A particularly important issue that arises when it comes to options is fixing their value. In this paper we present the classical models for valuing options: Black-Scholes model and binomial model. Existence of an analytical solution for the price of a European vanilla option allow analyzing how their prices respond to changes of variables and parameters. Options price response to these variables changes are virtually the sensitivity coefficients of the premium and main elements for measuring the risk that these financial assets involve when are used to define cover practices for such risks. In addition, the indicators facilitate the development of cash flows generated by the underlying asset, technique which can be useful if certain financial portfolio management strategies involve derivatives.

Keywords: options evaluation; Black-Scholes model; binomial options pricing model (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:aio:fpvfcf:v:1:y:2010:i:12:p:137-146

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