Title: Studies on European call option of binomial option pricing model using Taguchi's L27 orthogonal array

Authors: Amir Ahmad Dar; N. Anuradha

Addresses: Department of Mathematics and Actuarial Science, B S Abdur Rahman Crescent Institute of Science and Technology, Chennai-48, India ' Department of Management Studies, B S Abdur Rahman Crescent Institute of Science and Technology, Chennai-48, India

Abstract: There are several parameters affecting the European call option value such as strike price K, the price of an underlying asset S₀, volatility σ, time period t and interest rate r. In this paper, the binomial option pricing model is utilised to assess the estimation of a European call option. To explore the effects of input factors, Taguchi method of orthogonal L27 design experiment is carried out using an orthogonal array, analysis of variance (ANOVA), and analysis of mean (ANOM) were used. The purpose of this paper to find the best optimal combination by varying the parameters at constant interest rate r and the effects of parameters are discussed. The ANOM distinguishes which parameter influences higher on European call option value and furthermore, it demonstrates the best combination where the European call option will get the greatest value. The ANOVA estimates the percentage contribution of every parameter on European call option and the analysis is carried out using MINITAB software.

Keywords: binomial model; Taguchi's method; analysis of mean; ANOM; analysis of variance; ANOVA; option.

DOI: 10.1504/IJIE.2020.104663

International Journal of Intelligent Enterprise, 2020 Vol.7 No.1/2/3, pp.234 - 249

Received: 22 Nov 2018
Accepted: 14 Jan 2019
Published online: 27 Jan 2020 *

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