Binomial option pricing using Vensim

[Inthanongsone]

I'm now dealing with Binomial option pricing.
Does anyone has experience and knowledge about creating binomial tree using Vensim.

Basically, the underlying asset price (S0) is assumed to follow the multiplicative process of the up (U) and the down (D) movements.

If we let S0 be the price of underlying asset and If U = exp[volatility*SQRT(TIMESTEP)], D = 1/U, we have the binomial tree evolves as follows:

S0 S0*U S0*U^2 S0*U^3....
S0*D S0*UD S0*U^2D....
S0*D^2 S0*U*D^2...
S0*D^3....
Can we model this process using Vensim?

I appreciate every answers. Please help me out.

Thank you very much for your help.

Best regards, Inthanongsone

[tomfid]

I can't remember if Binomial is in here, but this contains some stochastic processes:
http://models.metasd.com/stochastic-processes/

It can definitely be done. Also see
https://www.vensim.com/documentation/in ... zation.htm
which may be of use.

[Inthanongsone]

Thank you very much Tom for the helpful and useful suggestions.

However, the problem is that I want to create binomial tree using Vensim.
The binomial tree looks like the figures attached in this message.
As I mentioned the binomial lattice evolves from double lattices to triple lattices and so forth (referred to figures).

Once again, please kindly help if you have a clue, an idea, and a solution to modeling the binomial in Vensim.

I can't thank you enough.

Thank you very much.

Best regards, Inthanongsone

[tomfid]

It's very close to the Brownian motion example model I linked, and also to the Polya urn:
http://models.metasd.com/polya-urn-with ... g-returns/

I think this is what you're after:

Binomial.mdl

(1.89 KiB) Downloaded 204 times

The tree isn't explicitly represented in the model (though you could probably do that with an array). Instead, it evolves dynamically. Each simulation with a different random seed will explore a (potentially) different set of branches.

[Inthanongsone]

Dear Tom,

Many thanks for this.
It is genuinely useful.

I'm really appreciated your kind help.

Regards,
Inthan

[LAUJJL]

Hi

This pricing system is really simplistic.

In the reality the pricing depends on the past situation as in any dynamic system.

The probability itself will depend on the pricing that will depend on the past situation.

I join a model where the level influences the probability by for instance price setting which is not detailed, to keep the level as close as possible to 0.

One can imagine all sorts of such systems.

One can notice that as one increases the effect of state on probability with the synthesim, the interval of variation of the level decreases.

Unfortunately in real systems, price setting is much more complex than that.

Regards.

JJ

[Inthanongsone]

Dear LAUJJL,

Thank you very much for your inputs into model.
I am appreciated it.

Regards, Inthan

[tomfid]

JJ - I think the idea here is to do (real) options in Vensim. The binomial pricing could be used to represent the (exogenous) movement of some commodity at the boundary of the model, to which other (endogenous) decision rules would respond. It would be interesting to know a little more about the target here.

[LAUJJL]

Hi Tom

My idea was to introduce some dynamic to your example even if it may not mean much from a realistic point of view or probably more close to my own problems.

Regards.

JJ

[tomfid]

I think that makes sense.

Also, a binomial random walk is really just an analytic convenience. In most situations I would prefer a richer, more operational representation of price movements.