IJSSER

Title: BINOMIAL OPTION PRICING AND RISK-NEUTRAL PRICING
Authors: Xinyue Zang
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Xinyue Zang Chatham Hall School Virginia
MLA 8 Zang, Xinyue. "BINOMIAL OPTION PRICING AND RISK-NEUTRAL PRICING." Int. j. of Social Science and Economic Research, vol. 7, no. 7, July 2022, pp. 2261-2269, doi.org/10.46609/IJSSER.2022.v07i07.035. Accessed July 2022. APA 6 Zang, X. (2022, July). BINOMIAL OPTION PRICING AND RISK-NEUTRAL PRICING. Int. j. of Social Science and Economic Research, 7(7), 2261-2269. Retrieved from https://doi.org/10.46609/IJSSER.2022.v07i07.035 Chicago Zang, Xinyue. "BINOMIAL OPTION PRICING AND RISK-NEUTRAL PRICING." Int. j. of Social Science and Economic Research 7, no. 7 (July 2022), 2261-2269. Accessed July, 2022. https://doi.org/10.46609/IJSSER.2022.v07i07.035.
References [1]. “The Binomial Model.” Binomial Model for Pricing Options - History and How It Works, 2017, https://www.optionstrading.org/improving-skills/advanced-terms/binomial-model/. [2]. “Binomial Options Pricing Model.” Wikipedia, Wikimedia Foundation, 25 Oct. 2021, https://en.wikipedia.org/wiki/Binomial_options_pricing_model. [3]. Chen, James. “How the Binomial Option Pricing Model Works.” Investopedia, Investopedia, 30 Dec. 2021, [4]. https://www.investopedia.com/terms/b/binomialoptionpricing.asp#:~:text=In%20a%20bin omial%20tree%20model,30%20percent%20in%20one%20period. [5]. “S&P 500 Index Options Prices.” Barchart.com, 2021, https://www.barchart.com/stocks/quotes/$SPX/options?expiration=2022-02-18-m. [6]. Sun, Jiaping. ??????????, https://m.xzbu.com/2/view-5831160.htm. “Vix Price, Real-Time Quote & News.” Google Finance, Google, 3 Jan. 2021, [7]. https://www.google.com/finance/quote/VIX:INDEXCBOE?sa=X&ved=2ahUKEwjVhYX gqfj0AhWjtTEKHfvsBwEQ3ecFegQIIhAc.
ABSTRACT: Initiated by the current popularity of buying stock and option, this paper talks about the topic of Binomial Option Pricing, which is an options evaluation method. Through the example of a European call option in IBM and a graphic demonstration of the option price, the basic background concept of option payoff (payoff and net payoff) and price bounds are introduced. Then, the Two-period Binomial Model is constructed through a binary tree and available market data. To increase the accuracy and minimize the potential deviation, we utilize Risk-Neutral Pricing through codes, which allows us to manipulate the number of steps in model. By controlling the number of steps, the models can not only provide data, but it can also illustrate a graphic demonstration, which gives a broad view of the convergence point. However, the realistic pricing still diverges from the theorical pricing that we obtain. By further research on the Binomial Pricing and Risk-Neutral Pricing, we find out the deviation may be cause by the general assumptions that are made to simplify the model and the fluctuation of data through time. However, a model can be constructed to observe and analysis the constant change of data, which may potentially increase the precision of the calculated pricing. The dynamic volatility and interest rate reflect the instability of the market, which may be considered both its charm and risk.

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