Exercise Style | |
Dividend Type |
|
Appropriate Model |
European | | None | | BS, GBS, BIN, BIN2 |
| | Continuous | | GBS, BIN, BIN2 |
| | Discrete | | BSdd, RGW, BIN2 |
American | | None | | BAW, BIN, BIN2 |
| | Continuous | | BAW, BIN, BIN22 |
| | Discrete | | BIN2 |
Bermudan | | None | | BIN2 |
| | Continuous | | BIN2 |
| | Discrete | | BIN2 |
|
Where,
BS = Black Scholes.
BSdd = Black Scholes with Discrete Dividends.
GBS = Generalized Black Scholes.
RGW = Roll Geske Whaley.
BAW = Barone-Adesi Whaley.
BIN = Binomial Option Pricing Model with constant timesteps.
BIN2 = Binomial Option Pricing Model with variable timesteps.
Note that while we list all of the pricing models that can be applied
to each type of option, some models are more appropriate than others.
For example, although both the Black Scholes model and the binomial option
pricing model can be used to value a European option on a stock that pays
no dividend, the Black Scholes model would be preferred in this case.
As the binomial model involves a numerical approximation to the 'true'
value (given by Black Scholes), it is slower to compute and less precise
than the Black Scholes model
|