/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Delta = d[price]/d[underlyingPrice].
/// </summary>
/// <returns>option delta</returns>
public static double BlackScholesDelta(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double N1 = Distributions.StandardNormalCumulativeDistributionFunction(d1);
if (putCallFlag == PutCallFlag.Call)
{
return(Math.Exp(-dividendYield * yearsToExpiry) * N1);
}
return(Math.Exp(-dividendYield * yearsToExpiry) * (N1 - 1.0));
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European option.
/// Returns the price, and outputs the Greeks.
/// Not as elegant looking, but faster than calculating each separately.
/// </summary>
public static double BlackScholesPriceAndGreeks(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag, out double delta, out double gamma, out double vega, out double theta, out double rho, out double convexity)
{
//setting dividendYield = 0 gives the classic Black Scholes model
//setting dividendYield = foreign risk-free rate gives a model for European currency options, see Garman and Kohlhagen (1983)
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double d2 = d1 - vol * sqrtT;
double N1 = Distributions.StandardNormalCumulativeDistributionFunction(d1);
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
double n1 = Distributions.StandardNormalProbabilityDensityFunction(d1);
double n2 = Distributions.StandardNormalProbabilityDensityFunction(d2);
double eNegRiskFreeRateTimesYearsToExpiry = Math.Exp(-riskFreeRate * yearsToExpiry);
double eNegDivYieldYearsToExpiry = Math.Exp(-dividendYield * yearsToExpiry);
double price;
if (putCallFlag == PutCallFlag.Call)
{
price = N1 * underlyingPrice * eNegDivYieldYearsToExpiry - N2 * strike * eNegRiskFreeRateTimesYearsToExpiry;
}
else
{
price = (1 - N2) * strike * eNegRiskFreeRateTimesYearsToExpiry - (1 - N1) * underlyingPrice * eNegDivYieldYearsToExpiry;
}
if (putCallFlag == PutCallFlag.Call)
{
delta = eNegDivYieldYearsToExpiry * N1;
}
else
{
delta = eNegDivYieldYearsToExpiry * (N1 - 1.0);
}
gamma = eNegDivYieldYearsToExpiry * n1 / (underlyingPrice * vol * sqrtT);
vega = underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * n1 * sqrtT;
if (putCallFlag == PutCallFlag.Call)
{
rho = yearsToExpiry * strike * eNegRiskFreeRateTimesYearsToExpiry * N2;
}
else
{
rho = -yearsToExpiry * strike * eNegRiskFreeRateTimesYearsToExpiry * (1 - N2);
}
double a = -underlyingPrice * eNegDivYieldYearsToExpiry * n1 * vol / (2.0 * sqrtT);
double b = dividendYield * underlyingPrice * eNegDivYieldYearsToExpiry;
if (putCallFlag == PutCallFlag.Call)
{
theta = a + b * N1 - riskFreeRate * strike * eNegRiskFreeRateTimesYearsToExpiry * N2;
}
else
{
theta = a - b * (1 - N1) + riskFreeRate * strike * eNegRiskFreeRateTimesYearsToExpiry * (1 - N2);
}
if (putCallFlag == PutCallFlag.Call)
{
convexity = rho * ((n2 * sqrtT) / (N2 * vol) - yearsToExpiry);
}
else
{
convexity = -rho * ((n2 * sqrtT) / ((1 - N2) * vol) + yearsToExpiry);
}
return(price);
}
/// <summary>
/// Bjerksund and Stensland price approximation for an American option
/// </summary>
/// <returns>price of the option</returns>
public static double BjerksundStensland(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double b = riskFreeRate - dividendYield;
if (putCallFlag == PutCallFlag.Call)
return BjerksundStenslandCall(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, b);
return BjerksundStenslandCall(underlyingPrice, strike, yearsToExpiry, vol, riskFreeRate - b, -b);
}
/// <summary>
/// Used for BlackScholesImpliedVol
/// </summary>
/// <returns>price of option</returns>
private static double BlackScholesPriceAndVega(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag, out double vega)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double d2 = d1 - vol * sqrtT;
if (putCallFlag == PutCallFlag.Call)
{
double N1 = Distributions.StandardNormalCumulativeDistributionFunction(d1);
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
double nn1 = Distributions.StandardNormalProbabilityDensityFunction(d1);
vega = underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * nn1 * sqrtT;
return(N1 * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) - N2 * strike * Math.Exp(-riskFreeRate * yearsToExpiry));
}
double Nn1 = Distributions.StandardNormalCumulativeDistributionFunction(-d1);
double Nn2 = Distributions.StandardNormalCumulativeDistributionFunction(-d2);
double n1 = Distributions.StandardNormalProbabilityDensityFunction(d1);
vega = underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * n1 * sqrtT;
return(Nn2 * strike * Math.Exp(-riskFreeRate * yearsToExpiry) - Nn1 * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry));
}
/// <summary>
/// Bjerksund and Stensland price approximation for an American option
/// </summary>
/// <returns>price of the option</returns>
public static double BjerksundStensland(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double b = riskFreeRate - dividendYield;
if (putCallFlag == PutCallFlag.Call)
{
return(BjerksundStenslandCall(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, b));
}
return(BjerksundStenslandCall(underlyingPrice, strike, yearsToExpiry, vol, riskFreeRate - b, -b));
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Theta = -d[price]/d[yearsToExpiry].
/// </summary>
/// <returns>option theta</returns>
public static double BlackScholesTheta(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double d2 = d1 - vol * sqrtT;
double a = -underlyingPrice *Math.Exp(-dividendYield *yearsToExpiry) * Distributions.StandardNormalProbabilityDensityFunction(d1) * vol / (2.0 * sqrtT);
double b = dividendYield * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry);
if (putCallFlag == PutCallFlag.Call)
{
return(a + b * Distributions.StandardNormalCumulativeDistributionFunction(d1) - riskFreeRate * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(d2));
}
return(a - b * Distributions.StandardNormalCumulativeDistributionFunction(-d1) + riskFreeRate * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(-d2));
}
/// <summary>
/// Gereralized Black, Scholes, Merton formula (1973) for European options with dividend
/// </summary>
/// <returns>price of the option</returns>
public static double BlackScholesPrice(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
//setting dividendYield = 0 gives the classic Black Scholes model
//setting dividendYield = foreign risk-free rate gives a model for European currency options, see Garman and Kohlhagen (1983)
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double d2 = d1 - vol * sqrtT;
if (putCallFlag == PutCallFlag.Call)
{
double N1 = Distributions.StandardNormalCumulativeDistributionFunction(d1);
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
return(N1 * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) - N2 * strike * Math.Exp(-riskFreeRate * yearsToExpiry));
}
double Nn1 = Distributions.StandardNormalCumulativeDistributionFunction(-d1);
double Nn2 = Distributions.StandardNormalCumulativeDistributionFunction(-d2);
return(Nn2 * strike * Math.Exp(-riskFreeRate * yearsToExpiry) - Nn1 * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry));
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Convexity = second derivative of price with respect to interest rate.
/// Not considered a standard Greek, but can be useful for portfolios with fixed income instruments and equity options.
/// </summary>
/// <returns>option interest rate convexity</returns>
public static double BlackScholesRateConvexity(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d2 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield - 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
double n2 = Distributions.StandardNormalProbabilityDensityFunction(d2);
double rho, convexity;
if(putCallFlag == PutCallFlag.Call)
{
rho = yearsToExpiry * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * N2;
convexity = rho * ((n2 * sqrtT) / (N2 * vol) - yearsToExpiry);
}
else
{
rho = -yearsToExpiry * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * (1 - N2);
convexity = -rho * ((n2 * sqrtT) / ((1 - N2) * vol) + yearsToExpiry);
}
return convexity;
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Rho = d[price]/d[riskFreeRate].
/// </summary>
/// <returns>option rho</returns>
public static double BlackScholesRho(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d2 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield - 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
if (putCallFlag == PutCallFlag.Call)
{
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
return yearsToExpiry * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * N2;
}
double Nn2 = Distributions.StandardNormalCumulativeDistributionFunction(-d2);
return -yearsToExpiry * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * Nn2;
}
/// <summary>
/// Gereralized Black, Scholes, Merton formula (1973) for European options with dividend
/// </summary>
/// <returns>price of the option</returns>
public static double BlackScholesPrice(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
//setting dividendYield = 0 gives the classic Black Scholes model
//setting dividendYield = foreign risk-free rate gives a model for European currency options, see Garman and Kohlhagen (1983)
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double d2 = d1 - vol * sqrtT;
if(putCallFlag == PutCallFlag.Call)
{
double N1 = Distributions.StandardNormalCumulativeDistributionFunction(d1);
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
return N1 * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) - N2 * strike * Math.Exp(-riskFreeRate * yearsToExpiry);
}
double Nn1 = Distributions.StandardNormalCumulativeDistributionFunction(-d1);
double Nn2 = Distributions.StandardNormalCumulativeDistributionFunction(-d2);
return Nn2 * strike * Math.Exp(-riskFreeRate * yearsToExpiry) - Nn1 * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry);
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European option.
/// Returns the price, and outputs the Greeks.
/// Not as elegant looking, but faster than calculating each separately.
/// </summary>
public static double BlackScholesPriceAndGreeks(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag, out double delta, out double gamma, out double vega, out double theta, out double rho, out double convexity)
{
//setting dividendYield = 0 gives the classic Black Scholes model
//setting dividendYield = foreign risk-free rate gives a model for European currency options, see Garman and Kohlhagen (1983)
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double d2 = d1 - vol * sqrtT;
double N1 = Distributions.StandardNormalCumulativeDistributionFunction(d1);
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
double n1 = Distributions.StandardNormalProbabilityDensityFunction(d1);
double n2 = Distributions.StandardNormalProbabilityDensityFunction(d2);
double eNegRiskFreeRateTimesYearsToExpiry = Math.Exp(-riskFreeRate * yearsToExpiry);
double eNegDivYieldYearsToExpiry = Math.Exp(-dividendYield * yearsToExpiry);
double price;
if(putCallFlag == PutCallFlag.Call)
price = N1 * underlyingPrice * eNegDivYieldYearsToExpiry - N2 * strike * eNegRiskFreeRateTimesYearsToExpiry;
else
price = (1 - N2) * strike * eNegRiskFreeRateTimesYearsToExpiry - (1 - N1) * underlyingPrice * eNegDivYieldYearsToExpiry;
if (putCallFlag == PutCallFlag.Call)
delta = eNegDivYieldYearsToExpiry * N1;
else
delta = eNegDivYieldYearsToExpiry * (N1 - 1.0);
gamma = eNegDivYieldYearsToExpiry * n1 / (underlyingPrice * vol * sqrtT);
vega = underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * n1 * sqrtT;
if(putCallFlag == PutCallFlag.Call)
rho = yearsToExpiry * strike * eNegRiskFreeRateTimesYearsToExpiry * N2;
else
rho = -yearsToExpiry * strike * eNegRiskFreeRateTimesYearsToExpiry * (1 - N2);
double a = -underlyingPrice * eNegDivYieldYearsToExpiry * n1 * vol / (2.0 * sqrtT);
double b = dividendYield * underlyingPrice * eNegDivYieldYearsToExpiry;
if(putCallFlag == PutCallFlag.Call)
theta = a + b * N1 - riskFreeRate * strike * eNegRiskFreeRateTimesYearsToExpiry * N2;
else
theta = a - b * (1 - N1) + riskFreeRate * strike * eNegRiskFreeRateTimesYearsToExpiry * (1 - N2);
if (putCallFlag == PutCallFlag.Call)
convexity = rho * ((n2 * sqrtT) / (N2 * vol) - yearsToExpiry);
else
convexity = -rho * ((n2 * sqrtT) / ((1 - N2) * vol) + yearsToExpiry);
return price;
}
/// <summary>
/// Calculates the implied vol for a European option using Newton-Raphson approach.
/// </summary>
public static double BlackScholesImpliedVol(double price, double strike, double underlyingPrice, double yearsToExpiry, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
const double tolerance = 0.001;
const int maxLoops = 16;
double vol = Math.Sqrt(2 * Math.Abs(Math.Log(underlyingPrice / strike) / yearsToExpiry + riskFreeRate)); //Manaster and Koehler intial vol value
vol = Math.Max(0.01, vol);
double vega;
double impliedPrice = BlackScholesPriceAndVega(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag, out vega);
int nLoops = 0;
while (Math.Abs(impliedPrice - price) > tolerance)
{
nLoops++;
if(nLoops > maxLoops)
throw new Exception("BlackScholesImpliedVol did not converge.");
vol = vol - (impliedPrice - price) / vega;
if(vol <= 0)
vol = 0.5 * (vol + (impliedPrice - price) / vega); //half way btwn previous estimate and zero
impliedPrice = BlackScholesPriceAndVega(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag, out vega);
}
return vol;
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European option Greeks.
/// </summary>
public static double BlackScholesGreek(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag, OptionGreeks optionGreek)
{
switch (optionGreek)
{
case OptionGreeks.Delta:
return BlackScholesDelta(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
case OptionGreeks.Gamma:
return BlackScholesGamma(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
case OptionGreeks.Rho:
return BlackScholesRho(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
case OptionGreeks.Theta:
return BlackScholesTheta(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
case OptionGreeks.Vega:
return BlackScholesVega(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
default:
return double.NaN;
}
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Delta = d[price]/d[underlyingPrice].
/// </summary>
/// <returns>option delta</returns>
public static double BlackScholesDelta(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double N1 = Distributions.StandardNormalCumulativeDistributionFunction(d1);
if (putCallFlag == PutCallFlag.Call)
return Math.Exp(-dividendYield * yearsToExpiry) * N1;
return Math.Exp(-dividendYield * yearsToExpiry) * (N1 - 1.0);
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Vega = d[price]/d[vol].
/// </summary>
/// <returns>option vega</returns>
public static double BlackScholesVega(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
//Put and call values are the same. I've left putCallFlag in parameters so that all the Black Scholes formulas have the same argument list.
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double n1 = Distributions.StandardNormalProbabilityDensityFunction(d1);
return(underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * n1 * sqrtT);
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Theta = -d[price]/d[yearsToExpiry].
/// </summary>
/// <returns>option theta</returns>
public static double BlackScholesTheta(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double d2 = d1 - vol * sqrtT;
double a = -underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalProbabilityDensityFunction(d1) * vol / (2.0 * sqrtT);
double b = dividendYield * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry);
if (putCallFlag == PutCallFlag.Call)
return a + b * Distributions.StandardNormalCumulativeDistributionFunction(d1) - riskFreeRate * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(d2);
return a - b * Distributions.StandardNormalCumulativeDistributionFunction(-d1) + riskFreeRate * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(-d2);
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Rho = d[price]/d[riskFreeRate].
/// </summary>
/// <returns>option rho</returns>
public static double BlackScholesRho(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d2 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield - 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
if (putCallFlag == PutCallFlag.Call)
{
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
return(yearsToExpiry * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * N2);
}
double Nn2 = Distributions.StandardNormalCumulativeDistributionFunction(-d2);
return(-yearsToExpiry *strike *Math.Exp(-riskFreeRate *yearsToExpiry) * Nn2);
}
/// <summary>
/// Barone Adesi and Whaley price approximation for an American option
/// </summary>
/// <returns>price of the option</returns>
public static double BaroneAdesiWhaley(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
if (dividendYield <= 0 && putCallFlag == PutCallFlag.Call)
return BlackScholesPrice(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
const double accuracy = 0.00001;
const double maxIterations = 500;
double volSqrd = vol * vol;
double sqrtT = Math.Sqrt(yearsToExpiry);
double m = 2.0 * riskFreeRate / volSqrd;
double n = 2.0 * (riskFreeRate - dividendYield) / volSqrd;
double k = 1.0 - Math.Exp(-riskFreeRate * yearsToExpiry);
double a = Math.Sqrt(Math.Pow((n - 1), 2.0) + (4.0 * m / k));
double q;
if(putCallFlag == PutCallFlag.Call)
q = 0.5 * (1 - n + a);
else
q = 0.5 * (1 - n - a);
//calculate seed value
double undPriceSeed;
if (putCallFlag == PutCallFlag.Call)
{
double b = -(n - 1.0) + Math.Sqrt(Math.Pow((n - 1), 2.0) + 4.0 * m);
double undPriceStarInf = strike / (1.0 - 2.0 / b);
double h = -((riskFreeRate - dividendYield) * yearsToExpiry + 2.0 * vol * sqrtT) * (strike / (undPriceStarInf - strike));
undPriceSeed = strike + (undPriceStarInf - strike) * (1.0 - Math.Exp(h));
}
else
{
double b = -(n - 1.0) - Math.Sqrt(Math.Pow((n - 1), 2.0) + 4.0 * m);
double undPriceStarInf = strike / (1.0 - 2.0 / b);
double h = ((riskFreeRate - dividendYield) * yearsToExpiry - 2.0 * vol * sqrtT) * (strike / (strike - undPriceStarInf));
undPriceSeed = undPriceStarInf + (strike - undPriceStarInf) * Math.Exp(h);
}
//Newton-Raphson
int nIterations = 0;
double undPriceI = undPriceSeed;
double g = 1.0;
double gPrime = 1.0;
while ((Math.Abs(g) > accuracy) && (Math.Abs(gPrime) > accuracy) && (nIterations++ < maxIterations) && (undPriceI > 0.0))
{
double bsPrice = BlackScholesPrice(strike, undPriceI, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
double d1 = (Math.Log(undPriceI / strike) + (riskFreeRate - dividendYield + 0.5 * volSqrd) * yearsToExpiry) / (vol * sqrtT);
if (putCallFlag == PutCallFlag.Call)
{
g = (1.0 - 1.0 / q) * undPriceI - strike - bsPrice + (1.0 / q) * undPriceI * Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(d1);
gPrime = (1.0 - 1.0 / q) * (1.0 - Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(d1))
+ (1.0 / q) * Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalProbabilityDensityFunction(d1) * (1.0 / (vol * sqrtT));
}
else
{
g = strike - undPriceI - bsPrice + (undPriceI / q) * (1.0 - Math.Exp(-dividendYield * yearsToExpiry));
gPrime = (1.0 / q - 1.0) * (1.0 - Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(-d1))
+ (1.0 / q) * Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalProbabilityDensityFunction(-d1) * (1.0 / (vol * sqrtT));
}
undPriceI = undPriceI - (g / gPrime);
}
double undPriceStar;
if (Math.Abs(g) > accuracy)
{
//undPriceStar = undPriceSeed; //could continue with this value, currently throws exception
throw new Exception("Newton-Raphson did not converge");
}
undPriceStar = undPriceI;
double price;
double bsPrice2 = BlackScholesPrice(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
if (putCallFlag == PutCallFlag.Call && underlyingPrice >= undPriceStar)
{
price = underlyingPrice - strike;
}
else if (putCallFlag == PutCallFlag.Put && underlyingPrice <= undPriceStar)
{
price = strike - underlyingPrice;
}
else
{
double d1 = (Math.Log(undPriceStar / strike) + (riskFreeRate - dividendYield + 0.5 * volSqrd) * yearsToExpiry) / (vol * sqrtT);
if (putCallFlag == PutCallFlag.Put) d1 *= -1.0;
double A = (1.0 - Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(d1)) * (undPriceStar / q);
if (putCallFlag == PutCallFlag.Put) A *= -1.0;
price = bsPrice2 + A * Math.Pow((underlyingPrice / undPriceStar), q);
}
return Math.Max(price, bsPrice2); // know value will never be less than BS value
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Convexity = second derivative of price with respect to interest rate.
/// Not considered a standard Greek, but can be useful for portfolios with fixed income instruments and equity options.
/// </summary>
/// <returns>option interest rate convexity</returns>
public static double BlackScholesRateConvexity(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d2 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield - 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
double n2 = Distributions.StandardNormalProbabilityDensityFunction(d2);
double rho, convexity;
if (putCallFlag == PutCallFlag.Call)
{
rho = yearsToExpiry * strike * Math.Exp(-riskFreeRate * yearsToExpiry) * N2;
convexity = rho * ((n2 * sqrtT) / (N2 * vol) - yearsToExpiry);
}
else
{
rho = -yearsToExpiry *strike *Math.Exp(-riskFreeRate *yearsToExpiry) * (1 - N2);
convexity = -rho * ((n2 * sqrtT) / ((1 - N2) * vol) + yearsToExpiry);
}
return(convexity);
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European options with dividend. Vega = d[price]/d[vol].
/// </summary>
/// <returns>option vega</returns>
public static double BlackScholesVega(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
//Put and call values are the same. I've left putCallFlag in parameters so that all the Black Scholes formulas have the same argument list.
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double n1 = Distributions.StandardNormalProbabilityDensityFunction(d1);
return underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * n1 * sqrtT;
}
/// <summary>
/// Calculates the implied vol for a European option using Newton-Raphson approach.
/// </summary>
public static double BlackScholesImpliedVol(double price, double strike, double underlyingPrice, double yearsToExpiry, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
const double tolerance = 0.001;
const int maxLoops = 16;
double vol = Math.Sqrt(2 * Math.Abs(Math.Log(underlyingPrice / strike) / yearsToExpiry + riskFreeRate)); //Manaster and Koehler intial vol value
vol = Math.Max(0.01, vol);
double vega;
double impliedPrice = BlackScholesPriceAndVega(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag, out vega);
int nLoops = 0;
while (Math.Abs(impliedPrice - price) > tolerance)
{
nLoops++;
if (nLoops > maxLoops)
{
throw new Exception("BlackScholesImpliedVol did not converge.");
}
vol = vol - (impliedPrice - price) / vega;
if (vol <= 0)
{
vol = 0.5 * (vol + (impliedPrice - price) / vega); //half way btwn previous estimate and zero
}
impliedPrice = BlackScholesPriceAndVega(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag, out vega);
}
return(vol);
}
/// <summary>
/// Finite difference method for European or American option without dividend.
/// </summary>
public static double FiniteDifference(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, PutCallFlag putCallFlag, bool isEuropean, int nPriceSteps, out double currentDelta, out double currentGamma, out double currentTheta)
{
//Adapted from Wilmott, Paul. Paul Wilmott Introduces Quantitative Finance. Wiley, 2001.
double[] undPriceArray = new double[nPriceSteps + 1]; //underlying asset prices
double[] payoffArray = new double[nPriceSteps + 1]; //payoff array
double dS = 2 * underlyingPrice / nPriceSteps; //max price = twice the strike or underlying
double dt = 0.9 / (vol * vol) / (nPriceSteps * nPriceSteps);
int nTimeSteps = (int)(yearsToExpiry / dt) + 1;
dt = yearsToExpiry / nTimeSteps;
double[,] optionValueArray = new double[nPriceSteps + 1, nTimeSteps + 1]; //option value array
int q = 1;
if(putCallFlag == PutCallFlag.Put) q = -1;
for(int i=0; i<=nPriceSteps; i++)
{
undPriceArray[i] = i * dS;
optionValueArray[i, 0] = Math.Max(q * (undPriceArray[i] - strike), 0);
payoffArray[i] = optionValueArray[i, 0];
}
for(int k = 1; k<= nTimeSteps; k++)
{
for(int i = 1; i< nPriceSteps; i++)
{
double delta = (optionValueArray[i + 1, k - 1] - optionValueArray[i - 1, k - 1]) / 2.0 / dS;
double gamma = (optionValueArray[i + 1, k - 1] - 2 * optionValueArray[i, k - 1] + optionValueArray[i - 1, k - 1]) / dS / dS;
double theta = -0.5 * vol * vol * undPriceArray[i] * undPriceArray[i] * gamma - riskFreeRate * undPriceArray[i] * delta + riskFreeRate * optionValueArray[i, k - 1];
optionValueArray[i, k] = optionValueArray[i, k - 1] - dt * theta;
}
optionValueArray[0, k] = optionValueArray[0, k - 1] * (1 - riskFreeRate * dt); //Boundary condition at S=0
optionValueArray[nPriceSteps, k] = 2 * optionValueArray[nPriceSteps - 1, k] - optionValueArray[nPriceSteps - 2, k]; //Boundary condition at S=infinity
//Check for early exercise
if(!isEuropean)
{
for(int i=0; i<=nPriceSteps; i++)
optionValueArray[i, k] = Math.Max(optionValueArray[i, k], payoffArray[i]);
}
}
int underlyingIndex = (int)(underlyingPrice / dS);
double currentValue = optionValueArray[underlyingIndex, nTimeSteps];
currentDelta = (optionValueArray[underlyingIndex + 1, nTimeSteps] - optionValueArray[underlyingIndex - 1, nTimeSteps]) / 2.0 / dS; //Central difference
currentGamma = (optionValueArray[underlyingIndex + 1, nTimeSteps] - 2 * optionValueArray[underlyingIndex, nTimeSteps] + optionValueArray[underlyingIndex - 1, nTimeSteps]) / dS / dS; //Central difference
currentTheta = -0.5 * vol * vol * undPriceArray[underlyingIndex] * undPriceArray[underlyingIndex] * currentGamma - riskFreeRate * undPriceArray[underlyingIndex] * currentDelta + riskFreeRate * optionValueArray[underlyingIndex, nTimeSteps]; //Black-Scholes
return currentValue;
}
/// <summary>
/// Barone Adesi and Whaley price approximation for an American option
/// </summary>
/// <returns>price of the option</returns>
public static double BaroneAdesiWhaley(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag)
{
if (dividendYield <= 0 && putCallFlag == PutCallFlag.Call)
{
return(BlackScholesPrice(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag));
}
const double accuracy = 0.00001;
const double maxIterations = 500;
double volSqrd = vol * vol;
double sqrtT = Math.Sqrt(yearsToExpiry);
double m = 2.0 * riskFreeRate / volSqrd;
double n = 2.0 * (riskFreeRate - dividendYield) / volSqrd;
double k = 1.0 - Math.Exp(-riskFreeRate * yearsToExpiry);
double a = Math.Sqrt(Math.Pow((n - 1), 2.0) + (4.0 * m / k));
double q;
if (putCallFlag == PutCallFlag.Call)
{
q = 0.5 * (1 - n + a);
}
else
{
q = 0.5 * (1 - n - a);
}
//calculate seed value
double undPriceSeed;
if (putCallFlag == PutCallFlag.Call)
{
double b = -(n - 1.0) + Math.Sqrt(Math.Pow((n - 1), 2.0) + 4.0 * m);
double undPriceStarInf = strike / (1.0 - 2.0 / b);
double h = -((riskFreeRate - dividendYield) * yearsToExpiry + 2.0 * vol * sqrtT) * (strike / (undPriceStarInf - strike));
undPriceSeed = strike + (undPriceStarInf - strike) * (1.0 - Math.Exp(h));
}
else
{
double b = -(n - 1.0) - Math.Sqrt(Math.Pow((n - 1), 2.0) + 4.0 * m);
double undPriceStarInf = strike / (1.0 - 2.0 / b);
double h = ((riskFreeRate - dividendYield) * yearsToExpiry - 2.0 * vol * sqrtT) * (strike / (strike - undPriceStarInf));
undPriceSeed = undPriceStarInf + (strike - undPriceStarInf) * Math.Exp(h);
}
//Newton-Raphson
int nIterations = 0;
double undPriceI = undPriceSeed;
double g = 1.0;
double gPrime = 1.0;
while ((Math.Abs(g) > accuracy) && (Math.Abs(gPrime) > accuracy) && (nIterations++ < maxIterations) && (undPriceI > 0.0))
{
double bsPrice = BlackScholesPrice(strike, undPriceI, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
double d1 = (Math.Log(undPriceI / strike) + (riskFreeRate - dividendYield + 0.5 * volSqrd) * yearsToExpiry) / (vol * sqrtT);
if (putCallFlag == PutCallFlag.Call)
{
g = (1.0 - 1.0 / q) * undPriceI - strike - bsPrice + (1.0 / q) * undPriceI * Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(d1);
gPrime = (1.0 - 1.0 / q) * (1.0 - Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(d1))
+ (1.0 / q) * Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalProbabilityDensityFunction(d1) * (1.0 / (vol * sqrtT));
}
else
{
g = strike - undPriceI - bsPrice + (undPriceI / q) * (1.0 - Math.Exp(-dividendYield * yearsToExpiry));
gPrime = (1.0 / q - 1.0) * (1.0 - Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(-d1))
+ (1.0 / q) * Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalProbabilityDensityFunction(-d1) * (1.0 / (vol * sqrtT));
}
undPriceI = undPriceI - (g / gPrime);
}
double undPriceStar;
if (Math.Abs(g) > accuracy)
{
//undPriceStar = undPriceSeed; //could continue with this value, currently throws exception
throw new Exception("Newton-Raphson did not converge");
}
undPriceStar = undPriceI;
double price;
double bsPrice2 = BlackScholesPrice(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag);
if (putCallFlag == PutCallFlag.Call && underlyingPrice >= undPriceStar)
{
price = underlyingPrice - strike;
}
else if (putCallFlag == PutCallFlag.Put && underlyingPrice <= undPriceStar)
{
price = strike - underlyingPrice;
}
else
{
double d1 = (Math.Log(undPriceStar / strike) + (riskFreeRate - dividendYield + 0.5 * volSqrd) * yearsToExpiry) / (vol * sqrtT);
if (putCallFlag == PutCallFlag.Put)
{
d1 *= -1.0;
}
double A = (1.0 - Math.Exp(-dividendYield * yearsToExpiry) * Distributions.StandardNormalCumulativeDistributionFunction(d1)) * (undPriceStar / q);
if (putCallFlag == PutCallFlag.Put)
{
A *= -1.0;
}
price = bsPrice2 + A * Math.Pow((underlyingPrice / undPriceStar), q);
}
return(Math.Max(price, bsPrice2)); // know value will never be less than BS value
}
/// <summary>
/// Used for BlackScholesImpliedVol
/// </summary>
/// <returns>price of option</returns>
private static double BlackScholesPriceAndVega(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag, out double vega)
{
double sqrtT = Math.Sqrt(yearsToExpiry);
double d1 = (Math.Log(underlyingPrice / strike) + (riskFreeRate - dividendYield + 0.5 * vol * vol) * yearsToExpiry) / (vol * sqrtT);
double d2 = d1 - vol * sqrtT;
if (putCallFlag == PutCallFlag.Call)
{
double N1 = Distributions.StandardNormalCumulativeDistributionFunction(d1);
double N2 = Distributions.StandardNormalCumulativeDistributionFunction(d2);
double nn1 = Distributions.StandardNormalProbabilityDensityFunction(d1);
vega = underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * nn1 * sqrtT;
return N1 * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) - N2 * strike * Math.Exp(-riskFreeRate * yearsToExpiry);
}
double Nn1 = Distributions.StandardNormalCumulativeDistributionFunction(-d1);
double Nn2 = Distributions.StandardNormalCumulativeDistributionFunction(-d2);
double n1 = Distributions.StandardNormalProbabilityDensityFunction(d1);
vega = underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry) * n1 * sqrtT;
return Nn2 * strike * Math.Exp(-riskFreeRate * yearsToExpiry) - Nn1 * underlyingPrice * Math.Exp(-dividendYield * yearsToExpiry);
}
/// <summary>
/// Cox-Ross-Rubinstein Binomial Tree
/// </summary>
/// <returns>price of the option</returns>
public static double BinomialTree(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag, bool isEuropean, int nSteps)
{
double b = riskFreeRate - dividendYield;
double[] optionValueArray = new double[nSteps + 1];
int z;
if (putCallFlag == PutCallFlag.Call)
{
z = 1;
}
else
{
z = -1;
}
double dt = yearsToExpiry / nSteps;
double u = Math.Exp(vol * Math.Sqrt(dt));
double d = 1.0 / u;
double a = Math.Exp(b * dt);
double p = (a - d) / (u - d);
double df = Math.Exp(-riskFreeRate * dt);
for (int i = 0; i <= nSteps; i++)
{
optionValueArray[i] = Math.Max(0, z * (underlyingPrice * Math.Pow(u, i) * Math.Pow(d, nSteps - i) - strike));
}
for (int j = nSteps - 1; j >= 0; j--)
{
for (int i = 0; i <= j; i++)
{
double e = df * (p * optionValueArray[i + 1] + (1 - p) * optionValueArray[i]);
if (isEuropean)
{
optionValueArray[i] = e;
}
else
{
double intrinsic = z * (underlyingPrice * Math.Pow(u, i) * Math.Pow(d, j - i) - strike);
optionValueArray[i] = Math.Max(intrinsic, e);
}
}
}
return(optionValueArray[0]);
}
/// <summary>
/// Black, Scholes, Merton formula (1973) for European option Greeks.
/// </summary>
public static double BlackScholesGreek(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag, OptionGreeks optionGreek)
{
switch (optionGreek)
{
case OptionGreeks.Delta:
return(BlackScholesDelta(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag));
case OptionGreeks.Gamma:
return(BlackScholesGamma(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag));
case OptionGreeks.Rho:
return(BlackScholesRho(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag));
case OptionGreeks.Theta:
return(BlackScholesTheta(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag));
case OptionGreeks.Vega:
return(BlackScholesVega(strike, underlyingPrice, yearsToExpiry, vol, riskFreeRate, dividendYield, putCallFlag));
default:
return(double.NaN);
}
}
/// <summary>
/// Finite difference method for European or American option without dividend.
/// </summary>
public static double FiniteDifference(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, PutCallFlag putCallFlag, bool isEuropean, int nPriceSteps, out double currentDelta, out double currentGamma, out double currentTheta)
{
//Adapted from Wilmott, Paul. Paul Wilmott Introduces Quantitative Finance. Wiley, 2001.
double[] undPriceArray = new double[nPriceSteps + 1]; //underlying asset prices
double[] payoffArray = new double[nPriceSteps + 1]; //payoff array
double dS = 2 * underlyingPrice / nPriceSteps; //max price = twice the strike or underlying
double dt = 0.9 / (vol * vol) / (nPriceSteps * nPriceSteps);
int nTimeSteps = (int)(yearsToExpiry / dt) + 1;
dt = yearsToExpiry / nTimeSteps;
double[,] optionValueArray = new double[nPriceSteps + 1, nTimeSteps + 1]; //option value array
int q = 1;
if (putCallFlag == PutCallFlag.Put)
{
q = -1;
}
for (int i = 0; i <= nPriceSteps; i++)
{
undPriceArray[i] = i * dS;
optionValueArray[i, 0] = Math.Max(q * (undPriceArray[i] - strike), 0);
payoffArray[i] = optionValueArray[i, 0];
}
for (int k = 1; k <= nTimeSteps; k++)
{
for (int i = 1; i < nPriceSteps; i++)
{
double delta = (optionValueArray[i + 1, k - 1] - optionValueArray[i - 1, k - 1]) / 2.0 / dS;
double gamma = (optionValueArray[i + 1, k - 1] - 2 * optionValueArray[i, k - 1] + optionValueArray[i - 1, k - 1]) / dS / dS;
double theta = -0.5 * vol * vol * undPriceArray[i] * undPriceArray[i] * gamma - riskFreeRate * undPriceArray[i] * delta + riskFreeRate * optionValueArray[i, k - 1];
optionValueArray[i, k] = optionValueArray[i, k - 1] - dt * theta;
}
optionValueArray[0, k] = optionValueArray[0, k - 1] * (1 - riskFreeRate * dt); //Boundary condition at S=0
optionValueArray[nPriceSteps, k] = 2 * optionValueArray[nPriceSteps - 1, k] - optionValueArray[nPriceSteps - 2, k]; //Boundary condition at S=infinity
//Check for early exercise
if (!isEuropean)
{
for (int i = 0; i <= nPriceSteps; i++)
{
optionValueArray[i, k] = Math.Max(optionValueArray[i, k], payoffArray[i]);
}
}
}
int underlyingIndex = (int)(underlyingPrice / dS);
double currentValue = optionValueArray[underlyingIndex, nTimeSteps];
currentDelta = (optionValueArray[underlyingIndex + 1, nTimeSteps] - optionValueArray[underlyingIndex - 1, nTimeSteps]) / 2.0 / dS; //Central difference
currentGamma = (optionValueArray[underlyingIndex + 1, nTimeSteps] - 2 * optionValueArray[underlyingIndex, nTimeSteps] + optionValueArray[underlyingIndex - 1, nTimeSteps]) / dS / dS; //Central difference
currentTheta = -0.5 * vol * vol * undPriceArray[underlyingIndex] * undPriceArray[underlyingIndex] * currentGamma - riskFreeRate * undPriceArray[underlyingIndex] * currentDelta + riskFreeRate * optionValueArray[underlyingIndex, nTimeSteps]; //Black-Scholes
return(currentValue);
}
/// <summary>
/// Cox-Ross-Rubinstein Binomial Tree
/// </summary>
/// <returns>price of the option</returns>
public static double BinomialTree(double strike, double underlyingPrice, double yearsToExpiry, double vol, double riskFreeRate, double dividendYield, PutCallFlag putCallFlag, bool isEuropean, int nSteps)
{
double b = riskFreeRate - dividendYield;
double[] optionValueArray = new double[nSteps + 1];
int z;
if (putCallFlag == PutCallFlag.Call)
z = 1;
else z = -1;
double dt = yearsToExpiry / nSteps;
double u = Math.Exp(vol * Math.Sqrt(dt));
double d = 1.0 / u;
double a = Math.Exp(b * dt);
double p = (a - d) / (u - d);
double df = Math.Exp(-riskFreeRate * dt);
for(int i=0; i<=nSteps; i++)
optionValueArray[i] = Math.Max(0, z * (underlyingPrice*Math.Pow(u, i)*Math.Pow(d, nSteps - i)-strike));
for(int j=nSteps-1; j>=0; j--)
{
for(int i=0; i<=j; i++)
{
double e = df *(p*optionValueArray[i+1] + (1-p)*optionValueArray[i]);
if(isEuropean)
{
optionValueArray[i] = e;
}
else
{
double intrinsic = z * (underlyingPrice * Math.Pow(u, i) * Math.Pow(d, j-i) - strike);
optionValueArray[i] = Math.Max(intrinsic, e);
}
}
}
return optionValueArray[0];
}