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Author | Topic:How to price an american put option | 2055 Views |
29 March 2011 at 10:43am
You can easily compute the price of an american put option with Fairmat. Example:
PV = 150;
K = 100;
rf = .05;
sigma = .30;
Maturity = 5;
are, respectively, the spot rate of underlying, the strike price of option, the risk free rate and volatility and the maturity of option (as year). You can price an american put option as following.
Open a new .fair file. Insert into "Parameter & Function" enviroment the input described above. They are all constant object.
Insert a GBM process into "Stochastic Processes" enviroment. Set Base Value equals to PV, Volatility equals to sigma and Control Parameters equals to Growth Rate, Risk Premium with Growth Rate field equals to rf.
Insert an american option type (the blue option) into "Option Map" enviroment. Digit the put option payoff (e.g. K- v1) into payoff expression and the Start End (maturity) ( from 0 to Maturity).
Set # of discrete steps into "Settings" main menu, "Numerical Settings", "# of discrete time steps" (the default set is 40).
And enjoy your evaluation <!-- s:D --><img src="{SMILIES_PATH}/icon_e_biggrin.gif" alt=" " title="Very Happy" /><!-- s:D -->
31 March 2011 at 10:29am
Thanks to put this startup example,
can you please attach the .fair model?
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