Pricing American Options on Dividend-Paying Stocks and Estimating the Greek Letters Using Leisen-Reimer Binomial Trees

Abstract

We present out work on computing the prices of American call and put options and the values of their Greek letters. The underlying stocks of the options are assumed to pay out cash dividends. For calculating option prices and their Greek letters we use the Leisen-Reimer binomial method. Through experiments we demonstrate that it converges both faster and more smoothly than the Cox-Ross-Rubinstein binomial method. We also present plots for the Greek letters calculated from American call and put options on non-dividend paying stocks. The calculation of the Greek letters with the Leisen-Reimer binomial method is explained.