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Here Are the Different Types of Option Pricing Theory

Option Pricing theory is one of the most popular theories today and there are mainly two types of option pricing theory- one is Black-Scholes model theory and the other is binomial theory. There is a very high possibility of error in both these theories because the values for these theories are derived from assets of the company.

Time is another important factor that has a very important role to play in Options Pricing theory. Calculations for this theory include the time periods which last for a number of years.

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Different types of Option Pricing Theory

Binomial Option pricing theory

Binomial Option Pricing Theory was developed in the year 1979 and is considered to be an options valuation method. This model uses iterative process where in different important specifications like nodes and the points in time, during an entire time span that ranges from date of valuation to expiration date of valuation.

This theory lessens down possibilities of changes in the price of a product and also completely removes possibility of any arbitrage. Advocates of this theory assume that there is a perfect market present and it is based on this assumption that they provide a mathematical calculation of a particular point within the specified time range.

This theory tries to take a risk-neutral approach and says that underlying security prices will either increase or decrease within the given time till the time this option becomes worthless. As a Finance student you have to include this topic in your assignment. So I would always suggest you to take analysing the firm in light of options theory assignment help from our company.

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Trinomial Option Pricing theory

It is that theory that incorporates three important values that assets of a particular company can have within the given time frame. These three values that underlying asset has, at a given point of time can either be greater, lesser or equal to the present value of the asset.

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