7
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The following gives a price of 1.13:

FinancialDerivative[{"American", "Put"}, {"StrikePrice" -> 90, 
  "Expiration" -> 1},  {"InterestRate" -> 0.1, "Volatility" -> 0.18, 
  "CurrentPrice" -> 100, "Dividend" -> 0.}]

While my calculation with binomial tree gives 1.26. This link on java agrees with my result. http://www.math.columbia.edu/~smirnov/options13.html

What's wrong with FinancialDerivative?

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3
  • $\begingroup$ Using the option Method->"Binomial" gives 1.2625, that is, FinancialDerivative[{"American", "Put"}, {"StrikePrice" -> 90, "Expiration" -> 1}, {"InterestRate" -> 0.1, "Volatility" -> 0.18, "CurrentPrice" -> 100, "Dividend" -> 0.}, Method -> "Binomial"] $\endgroup$
    – kglr
    Jun 13, 2017 at 21:54
  • $\begingroup$ @kglr But how is it possible to have such a large discrepancy between the two methods, binomial and Black-Scholes? $\endgroup$
    – Al Guy
    Jun 13, 2017 at 22:12
  • $\begingroup$ AIGuy, good point. I don't know how. $\endgroup$
    – kglr
    Jun 13, 2017 at 22:17

1 Answer 1

6
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Using the setting "Binomial" for the option Method gives 1.2625:

FinancialDerivative[{"American", "Put"}, {"StrikePrice" -> 90, 
  "Expiration" -> 1}, {"InterestRate" -> 0.1, "Volatility" -> 0.18, 
  "CurrentPrice" -> 100, "Dividend" -> 0.}, Method -> "Binomial"]

1.2625

With the default setting (Automatic) for this option, we get 1.13241.

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