Theory and Implementation of Black-Scholes and Binomial Options Pricing Models

Abstract

In this paper, author describes the project on binomial options pricing model (BOPM) and its application for security pricing. BOPM is explained for both one and multiple periods and price calculations are programmed with functions in Excel, the results are compared from Excel program to online Black-Scholes calculator. The paper informs about European call and put options. Evaluation of American options requires more complex approaches, and it is left outside of the scope of this project. The main goals of this paper highlighting the project are to accurately model the Black-Scholes formula with BOPM, and show-case the original Black-Scholes formula is only intended for the European options. There are many papers that argue it is almost never beneficial to exercise American option earlier than its maturity date except under specific conditions. The author will not be providing details on that point in this paper.

Keywords: Option pricing, Black-Scholes, Binomial Option Pricing Model

JEL Classification: G12, D84