Application of fuzzy theory to binomial option pricing model

Shu-xia Liu

Yi Chen

Na Xu

pp. 63-70

in: Bing-yuan Cao, Cheng-yi Zhang, Tai-fu Li (eds), Fuzzy information and Engineering I, Berlin, Springer, 2009

Abstract

This paper presents an extension of the binomial option pricing model, which has the capabilities to cope with uncertain assumptions. Such assumptions are represented and dealt with in the framework of fuzzy theory. As the stock price can not be known exactly in advance, the approach of taking stock price as fuzzy price is more realistic and be easily accepted. In this paper, we take stock price in each node as fuzzy variable instead of crisp, then build a fuzzy binomial tree model and get numerical result in one period case. The simulation for fuzzy multiperiod binomial pricing model is also provided.