Comparative Study of Methods for Derivative Pricing

Comparative Study of Methods for Derivative Pricing

Presenter(s)

Joel King

Comments

Presentation: 2:40 p.m.-3:00 p.m., Kennedy Union 207

Description

Stock Options are financial instruments whose values depend upon future price movements of the underlying stock. Since such movements are unknown, the price of the underlying stock is modeled as a random process. This presentation will be focused on the pricing of important options including European, American, and some other exotic options. The importance of the no-arbitrage principle will be emphasized as a necessary requirement to derive meaningful prices of stock options. Additionally, we’ll review the derivation of the classic Black-Scholes model as a limit of a binomial tree. Under the assumptions of the Black-Scholes model, determining or approximating a fair price for options is possible with a variety of methods. We’ll cover three major techniques: binomial trees, Monte Carlo simulations, and methods for solving the Black-Scholes partial differential equation. The results from each method will be compared and we’ll note the limitations of each approach.

Publication Date

4-20-2022

Project Designation

Capstone Project

Primary Advisor

Ruihua Liu

Primary Advisor's Department

Mathematics

Keywords

Stander Symposium project, College of Arts and Sciences

Comparative Study of Methods for Derivative Pricing

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