Pricing a Bermudan Option with the Binomial Model

Pricing a Bermudan Option with the Binomial Model

Seminar paper in the course

Derivatives
University of Ljubljana, Faculty of Economics

Summer semester 2015

mentor:                         izr. prof. dr. Aleš Ahčan

students:                         Eva Kießling

                                        Martina Marmai

                                        Žiga Koritnik

Table of Content

Table of Content        

List of Figures        

List of Abbreviations        

1.        Introduction        

2.        The Financial Instrument        

3.        The Binomial Model        

3.1        Example 1:        

3.2        Example 2        

4.        Bermudan Option        

4.1        How it works        

5.        Results        

Annex                

References        

List of Figures

Abbildung 1: Beispiel für eine Abbildung FH Logo        

Abbildung 2: Beispiel 2 Urkunde        

List of Abbreviations

a.a.O.        am angeführten Ort

AO        Abgabenordnung

Aufl.        Auflage

1. Introduction

This seminar paper deals with pricing a Bermudan option through the adoption of the binomial model. Using the binomial model is suitable for this type of option because this kind of financial instrument is designed to give the holder the opportunity of an early exercise, and the binomial model evaluates whether exercising before maturity or waiting brings a higher pay-off.(Cox et al. 1979, p. 1)Our paper provides therefore necessary theoretical foundation which includes information about the option type itself and the binomial model. The second part will explain the methodology of pricing the Bermudan option, and finally the pricing will be done with the program »EXCEL«.