On a Binomial Model of Option Pricing

Article type: Research Article

Authors: Antoniou, I.^{a; b} | Ivanov, V.V.^{a; c; 1} | Kryanev, A.V.^{a; d}

Affiliations: [a] International Solvay Institutes for Physics and Chemistry, CP-231, ULB, Bd. du Triomphe, 1050, Brussels, Belgium | [b] Theoretische Natuurkunde, Free University of Brussels, Brussels, Belgium | [c] Laboratory of Information Technologies, Joint Institute for Nuclear Research, 141980, Dubna, Russia | [d] Moscow Engineering and Physical Institute, 115409, Moscow, Russia

Correspondence: [1] The address for manuscript correspondence; V.V. Ivanov, Laboratory of Information Technologies, Joint Institute for Nuclear Research, 141980, Dubna, Rusia. Fax; +7 09621 65145. E-mail: ivanov@jinr.ru.

Abstract: The conventional models of option pricing are based on the artificial proposition of the market neutrality to the risk, which is equivalent to the assumption that the expected return μ, equals the risk-free return r. However, in real markets μ may significantly differ from r. This may lead to the noticeable difference between model and real values of option prices. We consider here a modification of the Cox-Ross-Rubenstein binomial model that takes into account the dependence of option prices on μ.

Keywords: Option pricing, Forecasting, Binomial model

DOI: 10.3233/JCM-2002-21-214

Journal: Journal of Computational Methods in Sciences and Engineering, vol. 2, no. 1-2, pp. 105-109, 2002