Back in the mid 90's I used the Black-Scholes Model and the Cox-Ross-Rubenstein (Binomial) Model's to price Options. That was nearly 15 years ago and I was wondering if there are any new models being used to price Options?
Answer
Black-Scholes itself didn't change a lot but we can now adjust it to deal with a lot more complicated factors to price more complicated contracts:
- stochastic volatility (Heston, Gatheral)
- stochastic rates (Hull)
- credit risk
- dividends
Other methods (computing intensive) have also evolved to deal with various types of contracts where BS is not very appropriate choice (e.g. Monte Carlo simulation for path-dependant options).
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