Bivariate Binomial Options Pricing (with an Application to American Futures Options with Stochastic Interest Rates)

Posted: 17 Aug 1999

See all articles by Jimmy E. Hilliard

Jimmy E. Hilliard

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Adam Schwartz

Washington and Lee University - Department of Business Administration

Alan L. Tucker

Pace University - Lubin School of Business

Date Written: February 1994

Abstract

We extend the procedures developed by Nelson and Ramaswamy (RFS, 1990) and Hull and White (JFQA, 1990) to accomodate more generalized diffusions and two possible correlated state variables thus yielding a bivariate vinomial options pricing technique. The advantage this technique offers is the ability to price American style options, thereby accomodating early exercise, despite the existence of two correlated underlying state variables. We illustrate the technique with an application to American futures options where the futures price and the short-rate of interest are stochastic. Our technique is computationally efficient and can be further generalized for multiple state variables, albeit with an accompanying rise in computational expense.

JEL Classification: 521

Suggested Citation

Hilliard, Jimmy E. and Schwartz, Adam and Tucker, Alan L., Bivariate Binomial Options Pricing (with an Application to American Futures Options with Stochastic Interest Rates) (February 1994). Available at SSRN: https://ssrn.com/abstract=5974

Jimmy E. Hilliard (Contact Author)

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
Baton Rouge, LA 70803-6308
United States
225-578-7676 (Phone)
225-578-6366 (Fax)

Adam Schwartz

Washington and Lee University - Department of Business Administration ( email )

Lexington, VA 24450
United States

Alan L. Tucker

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

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