Effect of Volatility on Binomial Model for the Valuation of American Options

This article presents the effect of volatility on binomial model for the valuation of American options. Volatility is a measure of the dispersion of an asset price about its mean level over a fixed time interval. Binomial model is a widespread numerical method of calculating the price of American op...

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Bibliographic Details
Published in:International journal of pure and applied sciences and technology 2013-09, Vol.18 (1), p.43-43
Main Authors: Fadugba, SE, Ajayi, A O, Nwozo, C R
Format: Article
Language:English
Subjects:
Binomials
Computational efficiency
Dispersions
Intervals
Mathematical models
Numerical analysis
Pricing
Volatility
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Summary:This article presents the effect of volatility on binomial model for the valuation of American options. Volatility is a measure of the dispersion of an asset price about its mean level over a fixed time interval. Binomial model is a widespread numerical method of calculating the price of American options, as it takes into consideration the possibilities of early exercise and other factors like dividends. The strength and weakness of volatility on the valuation of options were considered. Binomial model is computationally efficient, good for pricing American options, but not adequate to price path dependent options.
ISSN:2229-6107
2229-6107