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Options evaluation - Black-Scholes model vs. binomial options pricing model

Listed author(s):
  • Ioan TRENCA
  • Maria Miruna POCHEA
  • Angela Maria FILIP

    (Babes-Bolyai University Cluj-Napoca)

A huge number of financial institutions and companies use the options in risk management. A particularly important issue that arises when it comes to options is fixing their value. In this paper we present the classical models for valuing options: Black-Scholes model and binomial model. Existence of an analytical solution for the price of a European vanilla option allow analyzing how their prices respond to changes of variables and parameters. Options price response to these variables changes are virtually the sensitivity coefficients of the premium and main elements for measuring the risk that these financial assets involve when are used to define cover practices for such risks. In addition, the indicators facilitate the development of cash flows generated by the underlying asset, technique which can be useful if certain financial portfolio management strategies involve derivatives.

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Article provided by University of Craiova, Faculty of Economics and Business Administration in its journal Finance - Challenges of the Future.

Volume (Year): 1 (2010)
Issue (Month): 12 (December)
Pages: 137-146

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Handle: RePEc:aio:fpvfcf:v:1:y:2010:i:12:p:137-146
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