American Journal of Applied Mathematics and Statistics
ISSN (Print): 2328-7306 ISSN (Online): 2328-7292 Website: http://www.sciepub.com/journal/ajams Editor-in-chief: Mohamed Seddeek
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American Journal of Applied Mathematics and Statistics. 2017, 5(2), 62-71
DOI: 10.12691/ajams-5-2-4
Open AccessArticle

Application of Generalized Binomial Distribution Model for Option pricing

Bright O. Osu1, , Samson O. Eggege2 and Emmanuel J. Ekpeyong3

1Department of Mathematics, Michael Okpara University of Agriculture, Umudike, Nigeria

2Pope John Paul II Model Secondary School Umunagbor Amagborihitte Ezinitte Mbaise

3Department of Statistics, Michael Okpara University of Agriculture, Umudike, Nigeria

Pub. Date: July 20, 2017

Cite this paper:
Bright O. Osu, Samson O. Eggege and Emmanuel J. Ekpeyong. Application of Generalized Binomial Distribution Model for Option pricing. American Journal of Applied Mathematics and Statistics. 2017; 5(2):62-71. doi: 10.12691/ajams-5-2-4

Abstract

In this work, the Generalized Binomial Distribution (GBD) combined with some basic financial concepts is applied to generate a model for determining the prices of a European call and put options. To demonstrate the behavior of the option prices (call and put) with respect to variables, some numerical examples and graphical illustration have been given in a concrete setting to illustrate the application of the obtained result of the study. It was observed that when there is an increase in strike prices, it leads to decrease in calls option price C(0) and increase in puts option price P(0). Decrease in interest rate leads to decrease in calls option price P(0), and increase in puts option price P(0), and decrease in expiration date leads to decrease in calls option price C(0) and decrease in puts option price P(0). It was also found that the problem of option price can be approached using Generalized Binomial Distribution (GBD) associated with finance terms.

Keywords:
Generalized Binomial Distribution European call and put option portfolio Stock and Dwass identity

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