engleski

Binomial and trinomial trees versus Bjerksund and Stensland approximations for american options pricing

Numerical methods like binomial and trinomial trees and finite difference methods can be used to price a wide range of options contracts for which there are no known analytical solutions. American options are the most famous of that kind of options. Besides numerical methods, American options can be valued with the approximation formulas. The authors of the most famous approximation formulas are Bjerksund and Stensland ([3] and [4]). Comparative analysis of numerical methods for American option pricing and Bjerksund and Stensland formulas for approximation values of American options is carried out in this paper. When the value of American option is approximated by Bjerksund-Stensland analytical formulas, the computer time spent to carry out that calculation is very short (it can be considered as instantaneous). The computer time spent using numerical methods can vary from less than one second to several minutes or even hours. It is clear that more often increasing the time of computer calculation greater precision is obtained. However to be able to conduct a comparative analysis of numerical methods (binomial trees, trinomial trees) and Bjerksund and Stensland formulas for approximation values of American options, we will limit computer calculation time of numerical method to less than one second, which nearly corresponds to the calculation time of the Bjerksund and Stensland approximation. Therefore, we ask the question: Which method will be most accurate at nearly the same computer calculation time?

option pricing; binomial and trinomial trees; Bjerksund and Stensland formulas

nije evidentirano