CONVERGENCE OF LEISEN-REIMER BINOMIAL MODEL IN PRICING EUROPEAN OPTIONS
A European option is a financial contract which gives its holder a right (but not an obligation) to buy or sell an underlying asset from writer at the time of expiry for a pre-determined price. The continuous European options pricing model is given by the Black-Scholes formula, while the discrete mo...
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| Format: | Theses |
| Language: | Indonesia |
| Online Access: | https://digilib.itb.ac.id/gdl/view/12127 |
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| Institution: | Institut Teknologi Bandung |
| Language: | Indonesia |
| Summary: | A European option is a financial contract which gives its holder a right (but not an obligation) to buy or sell an underlying asset from writer at the time of expiry for a pre-determined price. The continuous European options pricing model is given by the Black-Scholes formula, while the discrete model can be priced using binomial model. We define the error simply as the difference between the binomial approximation and the value computed by the Black-Scholes formula. An interesting property about error is how to understand the convergence of the binomial model to the Black-Scholes model. In this theses, we prove that order of convergence one for Cox-Ross-Rubinstein binomial model (1979). |
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