bin_am_put_payout.cc

Financial Recipes

// file bin_am_put.cc
// author: Bernt A Oedegaard
// calculate the binomial option pricing formula for an American put

#include <cmath>             // standard mathematical library
#include <algorithm>             // defining the max() operator
#include <vector>           // STL vector templates
using namespace std;
    
double option_price_put_american_binomial_payout( double S,     // spot price
						  double X,     // exercice price
						  double r,     // interest rate
						  double y,     // payout
						  double sigma, // volatility
						  double t,     // time to maturity
						  int steps){  // no steps in binomial tree
   double R = exp(r*(t/steps));            // interest rate for each step
   double Rinv = 1.0/R;                    // inverse of interest rate
   double u = exp(sigma*sqrt(t/steps));    // up movement
   double uu = u*u;
   double d = 1.0/u;
   double p_up = (exp((r-y)*(t/steps))-d)/(u-d);
   double p_down = 1.0-p_up;
   vector<double> prices(steps+1);       // price of underlying
   vector<double> put_values(steps+1);       // value of corresponding put 

   prices[0] = S*pow(d, steps);  // fill in the endnodes.
   for (int i=1; i<=steps; ++i) prices[i] = uu*prices[i-1];
   for (int i=0; i<=steps; ++i) put_values[i] = max(0.0, (X-prices[i])); // put payoffs at maturity
   for (int step=steps-1; step>=0; --step) {
      for (int i=0; i<=step; ++i) {
	 put_values[i] = (p_up*put_values[i+1]+p_down*put_values[i])*Rinv;
	 prices[i] = d*prices[i+1];
	 put_values[i] = max(put_values[i],(X-prices[i]));       // check for exercise
      };
   };
   return put_values[0];
};