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
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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:
| Huguette Reynaerts | huguette.reynaerts@rug.ac.be |
| Michèle Vanmaele | michele.vanmaele@rug.ac.be |