Year: 2025
Type: article
Abstract: With the rapid development of financial markets and the increasing diversification of investment instruments and choices, exotic derivatives like the Chooser option have emerged. This special type of option contract grants holders the right to choose whether the option is a put or a call at the selection date. This flexibility facilitates investors' hedging policies and diversification to spread risk and enhance returns. However, pricing it appropriately becomes a difficult task because of its complexity. This paper first aims to price the Chooser option in two ways: the N-period Binomial tree model and the Black-Scholes model combined with Monte Carlo simulations. Then, the results from both approaches are compared and it is found that the outcomes are approximately equivalent when the parameters are held constant. Building on this finding, the computational efficiency of both methods in Python is analyzed, with fixing N (period) at 100. The results indicate that the running time of the Black-Scholes model exceeds that of the N-period Binomial tree model.
Source: Theoretical and Natural Science
Authors: Ming Ding, Jiaxin Liu, Yuching Wu
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W4410129585