pontazaricardo / Finance_American_average-rate_call

This program calculates the price of American-style arithmetic average-rate calls (ARO) based on the CRR binomial tree.

Finance_American_average-rate_call

This program calculates the price of American-style arithmetic average-rate calls (ARO) based on the CRR binomial tree.

Notes

1. The payoff function is max(average - X, 0).
2. If the holder exercises early, then average means the average up to that node.

Inputs and outputs

1. Inputs: S (stock price at time = 0), X (strike price), t (maturity in years), s (%) (annual volatility), r (%) (continuously compounded annual interest rate), n (number of periods), and k (number of states per node).
2. Output: Both delta and price of an American-style arithmetic average-rate (ARO) call.

How to use

In MatLab, just run the given file.

Example

Suppose S = 100, X = 70, t = 2 (years), s = 20%, r = 5%, n = 40, and k = 5.

1. The price is about 36.308.
2. The delta is about 0.9515.