###
3rd International Symposium
on

Imprecise
Probabilities and Their Applications

ISIPTA '03

#####
University of Lugano

Lugano, Switzerland

14-17 July 2003

####
ELECTRONIC PROCEEDINGS

## Huguette Reynaerts, Michèle Vanmaele

# A Sensitivity Analysis for the Pricing of Call Options in a Binary Tree Model

### Abstract

The European call option prices have well-known formulae in the Cox-Ross-Rubinstein
model, depending on the volatility of the underlying asset. Nevertheless it is hard to
give a precise estimate of this volatility. S. Muzzioli and C. Toricelli handle
this problem by using possibility distributions. In the first part of our paper we
make some critical comments on their work. In the second part we present an
alternative solution to the problem by performing a sensitivity analysis for the pricing
of the option. This method is very general in the sense that it can be applied
if one describes the uncertainty in the volatility by confidence intervals
as well as if one describes it by fuzzy numbers. The conclusion is that the price of
the option is not necessarily a strictly increasing function of the volatility.

** Keywords. ** Fuzzy sets, Option Pricing, Sensitivity Analysis

**Paper Download **

The paper is availabe in the following formats:

** Authors addresses: **

Huguette Reynaerts

Vakgroep Toegepaste Wiskunde en Informatica

Krijgslaan 281 S9

B9000 Gent

Michèle Vanmaele

Vakgroep Toegepaste Wiskunde en Informatica

Krijgslaa 281 S9

B9000 Gent

** E-mail addresses: **

[ back
to the Proceedings of ISIPTA '03 home page ]

Send any remarks to the following address:
smc@decsai.ugr.es