Research On The Pricing And Application Of Compound Options

Firstly,under the hypothesis of underlying asset price submitting to Geometric Brownian Motion, we obtain the price of dividend-paying Compound options by virtue of risk-neutral pricing theory when volatility is constant and expected return rate, risk-free interest rate and dividends rate are the nonrandom functions of time. Secondly, as it is hard to get analytic solution of compound options, and trinomial pricing model as a numerical calculation method is intuitive and convenient, so the article obtain compound options pricing model by establishing the trinomial tree model. Then analyze the sensitivity of related variables with example, which shows the change trend of the compound option value with relevant variables. Thirdly, traditional pricing approach could not meet the requirement to evaluate the investment project with high uncertainty. Since the option approach owns the advantages, such as figuring out the value of the flexibility of the management on the investment project and so on, it is widely used in the project evaluation. The four part of this paper goes to study the pricing method of the compound real options with multi-variables and multi-uncertainties based on trinomial model, and introduce this method to the investment decision of bio-pharmaceutical project. Finally comparing it with the traditional assessment methods through the example, we can see that trinomial tree analysis method of the compound real option can effectively evaluate the flexibility of the project value.