Modeling sequential R&D investments: a binomial compound option approach

A Practical Approach to Modeling Managerial Risk Aversion in Real Option Valuation for Early Stage Investments

In this work, we build on a previous real options approach that utilizes managerial cash-flow estimates to value early stage project investments, but accounting for managerial risk aversion. We introduce a market sector indicator, which is assumed to be correlated to a tradeable market index, which, through a mapping function, drives and replicates the cash-flow estimates. The mapping allows us...

Roos Compound binomial approximations

We consider the approximation of the convolution product of not necessarily identical probability distributions qj I + pjF , (j = 1, . . . , n), where, for all j , pj = 1 − qj ∈ [0, 1], I is the Dirac measure at point zero, and F is a probability distribution on the real line. As an approximation, we use a compound binomial distribution, which is defined in a one-parametric way: the number of t...

The Binomial Option Pricing Model

The simplest model for pricing d erivative securities is the binomial model. It generalizes the o n e period \up-down" model of Chapte r 1 t o a m ulti-period setting, assuming t hat t he price of the u nderlying asset follows a random walk. In the binomial model, there are N trading periods and N+1 trading d ates, t 0 t 1 ::: t N when it is possible to i n vest in a risky security with p r i c...

Programming Project: Binomial-model option-valuation

Binomial Models for Option Valuation { Examining Andimproving

Binomial models, which rebuild the continuous setup in the limit, serve for approximative valuation of options, especially where formulas cannot be derived mathematically. Even with the valuation of Europeancall options distorting irregularitiesoccur. For this case, sources of convergencepatterns are explained. Furthermore, it is proved order of convergence one for the Cox{Ross{Rubinsteinn79]mo...