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

Author

Listed:
  • Ioan TRENCA
  • Maria Miruna POCHEA
  • Angela Maria FILIP

    (Babes-Bolyai University Cluj-Napoca)

Abstract

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.

Suggested Citation

  • Ioan TRENCA & Maria Miruna POCHEA & Angela Maria FILIP, 2010. "Options evaluation - Black-Scholes model vs. binomial options pricing model," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(12), pages 137-146, December.
  • Handle: RePEc:aio:fpvfcf:v:1:y:2010:i:12:p:137-146
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    More about this item

    Keywords

    options evaluation; Black-Scholes model; binomial options pricing model;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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