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May 18

Nine Ways to Implement Binomial Tree Option Pricing

Posted by abiao at 14:51 | Code » Matlab | Comments(0) | Reads(23500)
Binomial tree model is almost the most popular yet easiest way for option pricing, for one thing, it can be used for most option classes in market, for example, European option, American option, Bermuda option, etc.; for another, Binomial tree is straitforward to implement, several lines are enough for a vanilla option. Besides, it has a not-bad convergence speed, read my old post A Simple Trick to Avoid Oscillation in Binomial Trees for improvement.

But how many ways are you able to implement binomial trees? here is a pretty interesting paper on Nine Ways to Implement Binomial Tree Option Pricing, unlike Mr. espen haug's more than 30 languages collection of Black Scholes model, these nine ways are all runnable in Matlab only, and the difference among them is computational efficiency, below is a plot of execution times of the first five
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here are the paper and matlab codes, you might feel in the end binomial tree implemention is not such easy grin.


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