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Option Pricing by Multinomial Trees and Markov Regime Switching Model

Haghgosha, Zahra | 2019

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 52086 (02)
  4. University: Sharif University of Technology
  5. Department: Mathematical Sciences
  6. Advisor(s): Zohuri-Zangeneh, Bijan
  7. Abstract:
  8. In the past decades, option pricing has become one of the major areas in modern financial theory and practice. The Black-Scholes-Merton method is a type of option pricing, which is an appropriate and very important model in financial markets due to the pricing process under the assumption of no arbitrage and the recognition of the appropriate discount rate.Inspite of its advantages, this model is not appropriate for pricing the options which need to be investigated before the maturity.To overcome this limitation, some discrete extension of Black Scholes model were introduced such as binomial and trinomial trees.In all of these models during the contract period, volatility is considered constant as one of the most important parameters of pricing, while the conditions of financial markets can be changed in some cases in such a way that variance of volatility varies considerably over time intervals. Therefore, considering The importance of this parameter for pricing, these change need to be applied to minimize erros in pricing model.The Markov regime switching MRSM in which market parameters, such as volatility are modeled over a Markov chain, is one of the most popular models that are presented to overcome these limitation and can be applied to a variety of discrete networks.In the studies conducted, the discrete trinomial network shows good behaviors when the regime changes. This thesis examines the price of options under polynomial trees and the application of regime change on trinomial networks
  9. Keywords:
  10. Options ; Derivatives ; Trinomial Tree ; Binomial Distribution ; Arbitrage ; Regime-Switching Model ; Option Pricing

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