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optstockbyitt

Price options on stocks using implied trinomial tree (ITT)

Syntax

[Price,PriceTree] = optstockbyitt(ITTTree,OptSpec,Strike,Settle,ExerciseDates)
[Price,PriceTree] = optstockbyitt(___,AmericanOpt)

Description

example

[Price,PriceTree] = optstockbyitt(ITTTree,OptSpec,Strike,Settle,ExerciseDates) returns the price of a European, Bermuda, or American stock option from an implied trinomial tree (ITT).

example

[Price,PriceTree] = optstockbyitt(___,AmericanOpt) adds an optional argument for AmericanOpt.

Examples

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This example shows how to price an American stock option using an ITT equity tree by loading the file deriv.mat, which provides the ITTTree. The ITTTree structure contains the stock specification and time information needed to price the American option.

load deriv.mat

OptSpec = 'Put';
Strike = 30;
Settle = '01-Jan-2006';
ExerciseDates = ' 01-Jan-2010 ';
AmericanOpt = 1;

Price = optstockbyitt(ITTTree, OptSpec, Strike, Settle,ExerciseDates, AmericanOpt)
Price = 0.1271

Load the file deriv.mat, which provides an ITTTree. The ITTTree structure contains the stock specification and time information needed to price the Bermudan option.

load deriv.mat;

% Option
OptSpec = 'Put';
Strike = 30;
Settle = '01-Jan-2006';
ExerciseDatesBerm={'1-Jan-2007','1-Jul-2007','1-Jan-2008','1-Jul-2008'};

Price the Bermudan option.

Price = optstockbyitt(ITTTree, OptSpec, Strike, Settle, ExerciseDatesBerm)
Warning: Some ExerciseDates are not aligned with tree nodes. Result will be approximated. 
> In procoptions at 171
  In optstockbystocktree at 22
  In optstockbyitt at 68 

Price =

    0.0664

Input Arguments

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Stock tree structure, specified by using itttree.

Data Types: struct

Definition of option, specified as 'call' or 'put' using a NINST-by-1 cell array of character vectors.

Data Types: char | cell

Option strike price value, specified with a NINST-by-1 or NINST-by-NSTRIKES depending on the option type:

  • For a European option, use a NINST-by-1 vector of strike prices.

  • For a Bermuda option, use aNINST-by-NSTRIKES matrix of strike prices. Each row is the schedule for one option. If an option has fewer than NSTRIKES exercise opportunities, the end of the row is padded with NaNs.

  • For an American option, use a NINST-by-1 of strike prices.

Note

The interpretation of the Strike and ExerciseDates arguments depends upon the setting of the AmericanOpt argument. If AmericanOpt = 0, NaN, or is unspecified, the option is a European or Bermuda option. If AmericanOpt = 1, the option is an American option.

Data Types: double

Settlement date or trade date, specified as a NINST-by-1 vector of date character vectors or serial date numbers.

Note

The Settle date for every option is set to the ValuationDate of the stock tree. The option argument Settle is ignored.

Data Types: char | double

Option exercise dates, specified as a NINST-by-1,NINST-by-2, or NINST-by-NSTRIKES using serial date numbers or date character vectors, depending on the option type:

  • For a European option, use a NINST-by-1 vector of dates. Each row is the schedule for one option. For a European option, there is only one ExerciseDates on the option expiry date.

  • For a Bermuda option, use a NINST-by-NSTRIKES vector of dates. Each row is the schedule for one option.

  • For an American option, use a NINST-by-2 vector of exercise date boundaries. The option can be exercised on any date between or including the pair of dates on that row. If only one non-NaN date is listed, or if ExerciseDates is a NINST-by-1 vector, the option can be exercised between ValuationDate of the stock tree and the single listed ExerciseDates.

Note

The interpretation of the Strike and ExerciseDates arguments depends upon the setting of the AmericanOpt argument. If AmericanOpt = 0, NaN, or is unspecified, the option is a European or Bermuda option. If AmericanOpt = 1, the option is an American option.

Data Types: double | char

(Optional) Option type, specified as NINST-by-1 vector of integer flags with values:

  • 0 — European or Bermuda

  • 1 — American

Data Types: single | double

Output Arguments

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Expected price of the vanilla option at time 0, returned as a NINST-by-1 vector.

Structure containing trees of vectors of instrument prices and a vector of observation times for each node. Values are:

  • PriceTree.PTree contains the clean prices.

  • PriceTree.tObs contains the observation times.

  • PriceTree.dObs contains the observation dates.

References

[1] Chriss, Neil A., E. Derman, and I. Kani. “Implied trinomial trees of the volatility smile.” Journal of Derivatives. 1996.

Introduced in R2007a

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