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Black-Scholes and Binomial Option Pricing Models

Research the variables that impact the pricing of options. Focus your energy on comparing the attributes of the two widely accepted models used for option pricing: Black-Scholes and Binomial Models.

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Variable that Impact Pricing of Options
There are five variables that impact on the options price. These variables include underlying price, the volatility, the risk free rate, the exercise price and the last is time to maturity. The detailed description of these variables is as follow:

The Price of Underlying Assets:
The option price is dependent upon the market price of underlying assets. It is identified that if the price of underlying asset increases, the premium of the call option will also rise and the premium of the put option will fail. On the diverse side, if the price of underlying asset drops, the premium of put option will rise and the premium of call option will fall (Ho & Lee, 2004).

The Volatility:
It is an important variable that impact on the pricing of an option. Volatility expresses the expectations to fluctuations in the price of the underlying asset. It influences the value of an option because it is a factor that determines the probability of an option in the end. It is identified that the ...

Solution Summary

The solution discusses Black Scholes and binomial option pricing models.