Derivatives - BSM and Black Model

CFA Level II Derivatives
#1

A few assumptions:

  1. The Black model (similar to BSM with a variation for S) can be used to price European options on forwards and futures, whereas the BSM is used to price European options other than forwards and futures.

  2. The binomial model is used for pricing options on bond prices and interest rates as well as for ALL American options.

Am I correct?

#2

Yes. Both your statements are correct Trekker.

#3

Thanks Ganesh.

#4

In Addition, Binomial method is used for European Option as well. In Contrast, Binomial Methos is applicable only to interest rate path independet Callble and Puttable Bonds (Plain Fixed Income Securities) than MBS or ABS, which may not be interest rate path independent.

KK

#5

You are right Krishna - BUT the binomial method is used on European options ONLY to price bond prices and interest rates - and not equities. Here is the summary: 1. Black model = used to price European options on forwards and futures 2. BSM = used to price European equity options 3. Binomial model = used to price European options on bond prices and interest rates AND ALL American options Do these seem right?