Author(s)

Lingkang Zhu¹, Xiu Kan^2*, Huisheng Shu^1*, Zifeng Wang¹

¹School of Science, Dong Hua University, Shanghai, China.
²School of Electronic and Electrical Engineering, Shanghai University of Engineering Science, Shanghai, China.

In this paper, the binomial tree method is introduced to price the European option under a class of jump-diffusion model. The purpose of the addressed problem is to find the parameters of the binomial tree and design the pricing formula for European option. Compared with the continuous situation, the proposed value equation of option under the new binomial tree model converges to Merton’s accurate analytical solution, and the established binomial tree method can be proved to work better than the traditional binomial tree. Finally, a numerical example is presented to illustrate the effectiveness of the proposed pricing methods.

Option Pricing, Binomial Tree, Jump-Diffusion Process, Moment Estimation

Zhu, L. , Kan, X. , Shu, H. and Wang, Z. (2019) A New Binomial Tree Method for European Options under the Jump Diffusion Model. Journal of Applied Mathematics and Physics, 7, 3012-3021. doi: 10.4236/jamp.2019.712211.