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Binomial and Black Scholes Functions

This document contains information about pricing American and European options using binomial option pricing in Excel. It shows the inputs and formulas to calculate prices for American and European puts and calls. It also examines the convergence of binomial option prices to the Black-Scholes model as the number of time steps (n) increases. A data table is set up to show binomial call prices approaching the Black-Scholes price as n gets larger.

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ShubhamJain
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46 views5 pages

Binomial and Black Scholes Functions

This document contains information about pricing American and European options using binomial option pricing in Excel. It shows the inputs and formulas to calculate prices for American and European puts and calls. It also examines the convergence of binomial option prices to the Black-Scholes model as the number of time steps (n) increases. A data table is set up to show binomial call prices approaching the Black-Scholes price as n gets larger.

Uploaded by

ShubhamJain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Bin_Opt_pricing_A_E

A B C D E F G
1 AMERICAN BINOMIAL OPTION PRICING IN EXCEL
2
3 S 60 Current stock price
4 X 60 Option exercise price
5 T 0.5000 Time to option exercise (in years)
6 r 8% Annual interest rate
7 Sigma 30% Riskiness of stock
8 n 50 Number of subdivisions of T
9
10 American put price #VALUE! <-- =AmericanPut(S,X,T,interest,sigma,n)
11 American call price #VALUE! <-- =AmericanCall(S,X,T,interest,sigma,n)
12
13 European put price #VALUE! <-- =EurPut(S, X,T,interest,sigma,n)
14 European call price #VALUE! <-- =EurCall(S, X,T,interest,sigma,n)
15
16 Put-call parity?
17 Delta t, Dt 0.0100 <-- =B5/B8
18 R = erDt 1.0008 <-- =EXP(B6*B17)
19
20 American put + Stock #VALUE! <-- =B10+B3
21 American call + Bond #VALUE! <-- American call price+X/R^n
22
23 European put + Stock #VALUE! <-- =B13+B3
24 European call + Bond #VALUE! <-- European call price+X/R^n

Page 1
Bin_Opt_pricing_A_E

H I J K L M N
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2 delta_t = T / n
3 up = Exp(sigma * Sqr(delta_t))
4 down = Exp(-sigma * Sqr(delta_t))
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Page 2
A B C D E F G
1 CONVERGENCE OF BINOMIAL TO BLACK-SCHOLES
2
3 S 60 Current stock price
4 X 50 Option exercise price
5 T 0.5000 Time to option exercise (in years)
6 r 8% Annual interest rate
7 Sigma 30% Riskiness of stock
8 n 20 Number of subdivisions of T
9
10 European binomial call price #VALUE! <-- =EurCall(S, X,interest,sigma,T,n)
11 European binomial put price #VALUE! <-- =EurPut(S, X,interest,sigma,T,n)
12
13 Black-Scholes call price #VALUE! <-- =BSCall(S, X,interest,sigma,T)
14 Black-Scholes put price #VALUE! <-- =BSPut(S, X,interest,sigma,T)
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16 Data table: As n gets large,
17 binomial price -> Black-Scholes
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19 Binomial call Black-Scholes
20 #VALUE! <-- The data table header in cell C20
21 10 #VALUE! #VALUE!
22 50 #VALUE! #VALUE!
23 75 #VALUE! #VALUE!
24 100 #VALUE! #VALUE!
25 125 #VALUE! #VALUE!
26 150 #VALUE! #VALUE!
27 175 #VALUE! #VALUE!
28 200 #VALUE! #VALUE!
29 225 #VALUE! #VALUE!
30 n --> 250 #VALUE! #VALUE!
31 275 #VALUE! #VALUE!
32 300 #VALUE! #VALUE!
33 325 #VALUE! #VALUE!
34 350 #VALUE! #VALUE!
35 375 #VALUE! #VALUE!
36 400 #VALUE! #VALUE!
37 425 #VALUE! #VALUE!
38 450 #VALUE! #VALUE!
39 475 #VALUE! #VALUE!
40 500 #VALUE! #VALUE!
H I J
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The data table20
header in cell C20 is hidden
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Convergence of Binomial to Black-Scholes

12.0000

10.0000

8.0000

Binomial call
#VALUE!
Black-Scholes
6.0000

4.0000

2.0000

0.0000
0 50 100 150 200 250 300 350 400 450 500
n = number of subdivisions of T

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