Worcester Polytechnic Institute Electronic Theses and Dissertations Collection

Title page for ETD etd-050411-132541


Document Typethesis
Author NameWolf, Diana Holmes
URNetd-050411-132541
Title Pricing American Options on Leveraged Exchange Traded Funds in the Binomial Pricing Model
DegreeMS
DepartmentMathematical Sciences
Advisors
  • Marcel Blais, Advisor
  • Keywords
  • Binomial Pricing Model
  • American Options
  • Leveraged Exchange Traded Funds
  • Date of Presentation/Defense2011-05-04
    Availability unrestricted

    Abstract

    This paper describes our work pricing options in the binomial model on leveraged exchange traded funds (ETFs) with three different approaches. A leveraged exchange traded fund attempts to achieve a similar daily return as the index it follows but at a specified positive or negative multiple of the return of the index. We price options on these funds using the leveraged multiple, predetermined by the leveraged ETF, of the volatility of the index. The initial approach is a basic time step approach followed by the standard Cox, Ross, and Rubinstein method. The final approach follows a different format which we will call the Trigeorgis pricing model. We demonstrate the difficulties in pricing these options based off the dynamics of the indices the ETFs follow.

    Files
  • dwolf.pdf

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