Tree methods for option pricingHasani, Nita (Avtor) Košir, Tomaž (Mentor) option pricingCox-Ross-Rubinstein modeltree methodsThe first tree model for option pricing was introduced by Cox, Ross and Rubinstein a few years after the revolutionary Black-Scholes formula. It provides a simple and intuitive pricing method, and it can also be used for decision making about early exerciseof options. We show how to construct this tree model and derive the pricing formula. When the number of time steps n increases, the price obtained by the tree method converges to the Black-Scholes price. We prove this convergence and investigate further its behaviour. The convergence rate is slow and oscillatory, and thus we discuss how to accelerate this convergence. Many other tree models have been constructed through the years in order to improve efficiency. We present both binomial and trinomial tree models and various choices of their parameters. Our focus is on European and American put and call options. However, it remains a challenge to decide on the optimal parametrization of the tree.20212021-04-24 08:15:02Magistrsko delo/naloga126499sl