Detailed Information on Publication Record

BENADA, Luděk and Martin CUPAL. The Classical and Stochastic Approach to Option Pricing. In Deev, O., Kajurová, V., Krajíček, J. Proceedings of the 11th International Scientific Conference European Financial Systems 2014. Brno: Masaryk University, 2014, p. 49-55. ISBN 978-80-210-7153-7.

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Basic information
Original name	The Classical and Stochastic Approach to Option Pricing
Authors	BENADA, Luděk (203 Czech Republic, guarantor, belonging to the institution) and Martin CUPAL (203 Czech Republic, belonging to the institution).
Edition	Brno, Proceedings of the 11th International Scientific Conference European Financial Systems 2014, p. 49-55, 7 pp. 2014.
Publisher	Masaryk University

Other information
Original language	English
Type of outcome	Proceedings paper
Field of Study	50200 5.2 Economics and Business
Country of publisher	Czech Republic
Confidentiality degree	is not subject to a state or trade secret
Publication form	printed version "print"
RIV identification code	RIV/00216224:14560/14:00077219
Organization unit	Faculty of Economics and Administration
ISBN	978-80-210-7153-7
UT WoS	000350701500006
Keywords in English	option pricing; lattices; Black-Scholes model; volatility; Geometric Brownian motion
Tags	International impact, Reviewed
Changed by	Changed by: Mgr. Daniela Marcollová, učo 111148. Changed: 2/4/2015 15:28.

Abstract
Black-Scholes model (BS) and lattices are well-known methodologies applied to option pricing, with their own specific features and properties. Briefly, lattices are discrete in the inner computing process and stochastically based, while BS is represented by a continuous functional form without single steps, but deterministic only. The strong assumption of constant volatility and the inability of application in valuing “American” options represent major disadvantages of the BS model. Its main advantage is its simplicity and ease of application. The use of Monte Carlo simulations constitutes an alternative to this model. Its main advantages include a relatively easy procedure of calculation and efficiency. Problems can arise when applied to the “American” option. Likewise, this method does not belong among highly sophisticated ones due to the requirements of prerequisites. If we were to consider a model that can work with the “American“ option, i.e. an option that may be exercised at any time before maturity, then calculation using the lattice approach is conceivable. In contrast, the disadvantage of this method lies in the lack of ability to apply continuous consistency with price development history as well as inability to work with a model that would require more underlying assets. Finally, the two approaches, Black-Scholes model and the lattice approach, considered for pricing options, derived their value from IBM stocks as an underlying asset. On individual valuations, accuracy of these valuation models will be observed in accordance with the real option price.

Abstract

Black-Scholes model (BS) and lattices are well-known methodologies applied to option pricing, with their own specific features and properties. Briefly, lattices are discrete in the inner computing process and stochastically based, while BS is represented by a continuous functional form without single steps, but deterministic only. The strong assumption of constant volatility and the inability of application in valuing “American” options represent major disadvantages of the BS model. Its main advantage is its simplicity and ease of application. The use of Monte Carlo simulations constitutes an alternative to this model. Its main advantages include a relatively easy procedure of calculation and efficiency. Problems can arise when applied to the “American” option. Likewise, this method does not belong among highly sophisticated ones due to the requirements of prerequisites. If we were to consider a model that can work with the “American“ option, i.e. an option that may be exercised at any time before maturity, then calculation using the lattice approach is conceivable. In contrast, the disadvantage of this method lies in the lack of ability to apply continuous consistency with price development history as well as inability to work with a model that would require more underlying assets. Finally, the two approaches, Black-Scholes model and the lattice approach, considered for pricing options, derived their value from IBM stocks as an underlying asset. On individual valuations, accuracy of these valuation models will be observed in accordance with the real option price.

Links
MUNI/A/0786/2013, interní kód MU	Name: Analýza a predikce vývoje cen finančních a investičních nástrojů
MUNI/A/0786/2013, interní kód MU	Investor: Masaryk University, Category A