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Essay / Research Paper Abstract
This 12 page paper looks at option pricing methods comparing and contrast the different ways of pricing options considering how useful and realistic these two pricing methods are when applied to the real world. The paper includes an explanation of each of the models. The bibliography cites 7 sources.
Page Count:
12 pages (~225 words per page)
File: TS14_TEblacksc.rtf
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Unformatted sample text from the term paper:
for options. The difficulties in this are not only due to the way in which markets behave irrationally at times but also due to the differences seen in the various
markets. Two models that can be used are the Black-Scholes model and Cox, Ross and Rubinsteins binomial model. By looking at both of these model we ca compare and contrast
them and their use. The paper will start with an in-depth view of the Black-Scholes model, what it is how it is applied and the flaws with the model and
then consider Cox, Ross and Rubinsteins binomial model. The Black-Scholes model is a model that looks a the varying prices of financial
instruments, specifically options and stock over time, recognising that they act in a volatile manner. This was developed by Fisher Black and Myron Scholes in 1973 which built on
former work undertaken by Samuelson and Merton. It can be argued that the Black-Scholes model was a revolution in economics, increasing the knowledge and understanding of how prices were reached
for many different financial tools that had features similar to options (Fortune, 1996). The model also facilitated the a revision on
the more traditional financial measures that had been used, for example the viewing of corporate debt as a put option as theoretically the shareholders could turn a company over to
the shareholders (Fortune, 1996). The model is aimed at the European market and looks at options where there is no option to exercise prior to the expiration date. The
main model is for options with no dividends, but as we will see the model can be adapted to cope with instruments that pay dividends that are assumed to be
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