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Review and Practice of Option Pricing Research
- 1 University of Bristol
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Abstract
This paper reviews the past research on option pricing, including the Bachelier option pricing formula, Black-Scholes model, and the Cox-Ross-Rubinstein (CRR) binomial option pricing model. Then some practical calculations are performed on the Black-Scholes model and CRR binomial model and the differences between the results of these two models are analyzed for investors to choose the appropriate model for option prices. From the practical calculation results, it is verified that the Black-Scholes model can give out the analytical solutions of option prices and decrease the calculation of solution, while it can only be used for European options with stock prices regarded as a continuous process. For the CRR binomial model, although it can only give numerical solutions and requires lots of calculation because of too many branches, but it can solve the American option prices with early exercises and the European option prices with stock prices regarded as a discrete process.
Keywords
option pricing, Black-Scholes Model, CRR binomial model
[1]. Bachelier, L. (1900). Théorie de la spéculation. In Annales scientifiques de l'École normale supérieure (Vol. 17, pp. 21-86).
[2]. Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637–654.
[3]. Cox, J. C., Ross, S. A., & Rubinstein, M. (1979). Option pricing: A simplified approach. Journal of Financial Economics, 7(3), 229-263.
[4]. Hull, J. C. (2003). Options futures and other derivatives. Pearson Education India.
Cite this article
Li,Y. (2023). Review and Practice of Option Pricing Research. Advances in Economics, Management and Political Sciences,7,320-328.
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Volume title: Proceedings of the 2nd International Conference on Business and Policy Studies
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