Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I receive that paper from course hero but it show 100% match, so if all possible could someone rewrite this for me. 1 Running head:

image text in transcribed

I receive that paper from course hero but it show 100% match, so if all possible could someone rewrite this for me.

image text in transcribed 1 Running head: OPTION PRICING AND CAPITAL BUDGETING TECHNIQUES Option Pricing and Capital Budgeting Techniques Cheryl Booker Columbus Southern University 2 OPTION PRICING AND CAPITAL BUDGETING TECHNIQUES Option Pricing and Capital Budgeting Techniques Option pricing Options are contracts regarding derivative that gives a right to a holding though it is an obligation that either buy or sell an item at a specified price either before or at a specified future date. There is no obligation of the buyer to exercise the option seller who is bound to sell or buy an item if the item gets used. Even though it depends on varieties options trading has multiple benefits leverage and security of limited security. According to Chiarella and Ziveyi (2014) option enhances the portfolio of investment in falling, rising and neutral markets. Several factors determine the option pricing. The following includes some of the factors; current stock price, strike price types of options, days until expiration among others. However, the focus of this paper is concerned with the two models of the option pricing. The models are Black-Scholes and the Binomial Models. Black-Scholes model Black-Scholes model is defined as price variation of financial instruments over time. A Good example is the stocks that act as determining factors in the European call option. The model put it that the price of the traded assets pursues a geometric Brownian motion. The Brownian motion is in a volatility and drift motions. If in any case the model is applied to a stock option then it includes a constant price variation of strike price, stock, expiry option as well as the time value of money (Kallianpur & Karandikar, 2012). Its formula has a parameter that is not observable in the market. The method seems to increase in the formula hence being inverted so as to produce volatility surface. The volatility 3 OPTION PRICING AND CAPITAL BUDGETING TECHNIQUES surface gets used in calibrating other models. The assumption of the model is that the market contains, at least, one risky asset that gets referred to like the stock. There is also one riskless asset that is referred to as money market or else the bond market. The assumptions that are made on the market show that there is no arbitrage opportunity. Binomial options pricing model The other commonly applicable model is the binomial options pricing model. The model provides a numerical method that is generalized for the valuation of choices. One of the most used models in the varying price over time is the discrete time. All in all, there are no closed form solutions in the binomial option pricing. In most of the cases, the model is applied in the market since it is in a position to handle issues that other models cannot handle. The model describes the underlying instrument over time. The model is at the same time used in valuing American options that are exercised at any moment in a given moment (Kallianpur & Karandikar, 2012). . The model is simply implemented in the computers software. The model is slower when compared to the BlackScholes formula but all the same; it is more accurate specifically on longer dated options. It is due to such reasons that the model is used in the options markets of the practitioners. The model has some difficulties in sources of uncertainty such as the real options. Similarly, there are difficulties in the complicated issues such as the Asian options. It is in the discrete time that the binomial pricing model has the evolution of the option key that is underlying the variables. However, this is achieved through the binomial lattice (tree). The binomial lattice has some steps 4 OPTION PRICING AND CAPITAL BUDGETING TECHNIQUES that are under the expiration dates and valuation. The estimate is performed iteratively from the final nodes through the tree to the first node. References Chiarella, C., & Ziveyi, J. (2014). Pricing American options written on two underlying assets. Quantitative Finance, 14(3), 409-426. Kallianpur, G., & Karandikar, R. L. (2012). Introduction to option pricing theory. Springer Science & Business Media

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations Of Financial Management

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta

11th Canadian Edition

1259024970, 978-1259265921

More Books

Students also viewed these Finance questions