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Applying Greek letters to robust option price modeling by binomial-tree

Bahareh Ghafarian, Payam Hanafizadeh and Amir Hossein Mortazavi Qahi

Physica A: Statistical Mechanics and its Applications, 2018, vol. 503, issue C, 632-639

Abstract: In this paper, a new model is proposed for pricing a European option using the binomial tree method in conjunction with the Greek letters. In the proposed method, the covariance matrix of high and low stock prices was calculated in an uncertainty region. Applying robust option pricing model, an ‘interval’ of prices (instead of ‘spot’ prices) for an option was obtained. Greek letters were incorporated into a robust option model to ameliorate the accuracy of the interval price. It was found out that the interval prices obtained by the present model were flexible with increased accuracy compared with those obtained by the robust option using the binomial tree model. It is also indicated that the advantage of the present model over existing models is more tangible in the event of ‘out of the money’ call option. Furthermore, the accuracy improvement was found to be less noticeable when the maximum costs were equal to each other.

Keywords: Greek letters; Option pricing; Binomial tree; Robust approach (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:phsmap:v:503:y:2018:i:c:p:632-639