inst/book/C-BinomialTrees/R/EuropeanCall.R

In NMOF: Numerical Methods and Optimization in Finance

# EuropeanCall.R -- version 2010-12-28
EuropeanCall <- function(S0,X,r,T,sigma,M) {
    # compute constants
    f7 <- 1;  dt <- T/M; v <- exp(-r * dt)
    u  <- exp(sigma * sqrt(dt)); d <- 1/u
    p  <- (exp(r * dt) - d) / (u - d)
    
    # initialize asset prices at maturity (period M)
    S <- numeric(M + 1)
    S[f7+0] <- S0 * d^M
    for (j in 1:M) S[f7+j] <- S[f7+j - 1] * u / d
    
    # initialise option values at maturity (period M)
    C <- pmax(S - X, 0)
    
    # step back through the tree
    for (i in seq(M-1, 0, by = -1)){
        C <- v * (p * C[(1+f7):(i+1+f7)] + 
             (1 - p)* C[(0+f7):(i+f7)])
    }
    C
}