Abstract
This paper will first demonstrate how Microsoft Excel can be used to create the Decision Trees for the Binomial Option Pricing Model. At the same time, this paper will discuss the Binomial Option Pricing Model in a less mathematical fashion. All the mathematical calculations will be done by the Microsoft Excel program that is presented in this paper. Finally, this paper uses the Decision Tree approach to demonstrate the relationship between the Binomial Option Pricing Model and the Black-Scholes Option Pricing Model.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Please note that in Lee et al. (2000, p. 234) u = 1 + percentage of price increase, d = 1 − percentage of price increase.
References
Benninga, S. 2000. Financial modeling. MIT Press, Cambridge.
Benninga, S. 2008. Financial modeling. MIT Press, Cambridge.
Black, F. and M. Scholes. 1973. “The pricing of options and corporate liabilities.” Journal of Political Economy 31, 637–659.
Cox, J., S. A. Ross, and M. Rubinstein. 1979. “Option pricing: a simplified approach.” Journal of Financial Economics 7, 229–263.
Lee, C. F., J. C. Lee, and A. C. Lee. 2000. Statistics for business and financial economics. World Scientific, NJ.
Rendleman, R. J., Jr., and B. J. Barter. 1979. “Two-state option pricing.” Journal of Finance, 34(5), 1093–1110.
Wells, E. and S.Harshbarger, 1997. Microsoft Excel 97 Developer’s Handbook. Microsoft Press, Redmond.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2010 Springer Science+Business Media, LLC
About this chapter
Cite this chapter
Lee, J. (2010). Binomial OPM, Black-Scholes OPM and Their Relationship: Decision Tree and Microsoft Excel Approach. In: Lee, CF., Lee, A.C., Lee, J. (eds) Handbook of Quantitative Finance and Risk Management. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-77117-5_42
Download citation
DOI: https://doi.org/10.1007/978-0-387-77117-5_42
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-387-77116-8
Online ISBN: 978-0-387-77117-5
eBook Packages: Business and EconomicsEconomics and Finance (R0)