The example question for these solutions can be found on my website (click here).

#### 6.1 Explicit Finite Difference For Option Pricing

In this example we are going to price a European call option with explicit finite difference.

The example question for these solutions can be found on my website (click here).

In this example we are going to price a European call option with explicit finite difference.

The example question for these solutions can be found on my website (click here).

The two most popular models for using binomial trees to price options are

- Cox et al. (1979) (CRR for short) whose extra degree of freedom is to set
thus

- Rendleman and Bartter (1979) who choose:
and so

We wish to generate a stock price tree, so denote the value of the underlying asset after timestep i
and upstate j by S_{ij} and we have that:

Now we are going to value an European call option using Monte-Carlo. The setup is very simple, we just need to sum up the payoffs from a bunch of sample paths and then take the average. First start with an empty program except for the random number generator, as follows

A previous post of mine dealt with setting up an empty project on Visual Studio 2012, which you can find if you click here. If you follow the instructions there you will find that the terminal

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