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Robust Option through Binomial Tree Method

Robust Option through Binomial Tree Method

Payam Hanafizadeh, Amir Hossein Mortazavi Qahi, Kumaraswamy Ponnambalam
Copyright: © 2015 |Volume: 6 |Issue: 4 |Pages: 12
ISSN: 1947-8569|EISSN: 1947-8577|EISBN13: 9781466677562|DOI: 10.4018/IJSDS.2015100103
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MLA

Hanafizadeh, Payam, et al. "Robust Option through Binomial Tree Method." IJSDS vol.6, no.4 2015: pp.42-53. http://doi.org/10.4018/IJSDS.2015100103

APA

Hanafizadeh, P., Qahi, A. H., & Ponnambalam, K. (2015). Robust Option through Binomial Tree Method. International Journal of Strategic Decision Sciences (IJSDS), 6(4), 42-53. http://doi.org/10.4018/IJSDS.2015100103

Chicago

Hanafizadeh, Payam, Amir Hossein Mortazavi Qahi, and Kumaraswamy Ponnambalam. "Robust Option through Binomial Tree Method," International Journal of Strategic Decision Sciences (IJSDS) 6, no.4: 42-53. http://doi.org/10.4018/IJSDS.2015100103

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Abstract

This study proposes a robust approach for pricing a European option using the binomial tree method. This method considers stock up and down prices in a closed and convex region, called the uncertainty region, defined by the covariance matrix of high and low stock prices. The option model uses this uncertainty region for pricing instead of spot prices. The method proposes an interval of prices for an option considering incidences of the worst and the best states of the stock price. The interval is flexible as it takes into account the covariance of the historical data of a stock's high and low prices and the radius of an uncertainty region.

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