Binomial Method, Design Patterns and Excel Output
Daniel J. Duffy, Andrea Germani · 2013
In this chapter, the author designs and implements a well-known application, namely the binomial method to price one-factor and two-factor options. It describes the mathematics, software design and implementation of the method. The chapter explains it as a step-by-step discussion that is useful for the readers who wish to gain hands-on experience. The design principles and data structures discussed in the chapter can be used in other applications. It also discusses the high-level architecture for the application that we implement in C#. The author also designs the system at a higher level by first decomposing it into a set of loosely coupled subsystems, each of which has a well-defined responsibility. The chapter shows how to extend the application to support option pricing with early exercise features. It explains the theory of Padé rational approximation that can be used to approximate functions such as the exponential function.