-3
$\begingroup$

I recently purchased Paul Wilmott's Quant Finance FAQ book. In the book he states that the binomial option valuation method is 'rubbish'. Can anyone enlighten me as to what method he recommends for pricing an American option?

$\endgroup$
  • 2
    $\begingroup$ Could you please provide the context and the exact quote including page no. - Thank you $\endgroup$ – vonjd Nov 29 '17 at 19:08
1
$\begingroup$

Lol, Mr Wilmott likes to provoke. If I had to guess I'd say that he would recommend a finite difference PDE method. Compared to that a binomial tree looks crude and inferior indeed, in almost every respect. PDE-based methods (discretized with finite differences/elements/volumes) offer far more flexibility and the literature on them is huge (borrowed from other disciplines, such as Computational Fluid Dynamics). I honestly don't know why anyone would use a binomial tree instead of a PDE method.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.