﻿ Available Functions > Exotic Option Functions > Multiple Exercise Option Functions > Compound Binomial

# Compound Binomial Function

The CompoundBin function calculates the theoretical price, sensitivities, the implied volatility, and the implied strike value of an American or European style compound option using a binomial model. This model evaluates compound options where the compound option and the underlying option both expire at the same time. See Multiple Exercise Options for a further explanation.

 CompoundBin (ExerciseType, OptionType, ModelStatistic, Asset, StrikeOption, StrikeUnderly, TimeExpire, Volatility, InterestRate, YieldRate, Iterations, MarketPrice, TimeFormat, InterestType, YieldType)

Note: Optional arguments are shown in Italics. MarketPrice is not Optional for the Implied Calculations.

 Argument Description ExerciseType Alphanumeric value indicating the exercise type: •American = 0 or "a" (case insensitive)•European = 1 or "e" (case insensitive) OptionType Alphanumeric value indicating the type of option: •Call_Call = 1 or "cc" (call option on a call option)•Call_Put = 2 or "cp" (call option on a put option)•Put_Call = 3 or "pc" (put option on a put option)•Put_Put = 4 or "pp" (put option on a put option) ModelStatistic Numeric value indicating the type of function required for the return value: •Theoretical = 1•Delta = 2•Gamma = 3•Theta = 4•ImpliedVol = 5•Vega = 6•Rho = 7•Psi = 8•Lambda = 9•UnderlyStrikeSensativity = 58•UnderlyImpliedStrike = 59•OptionStrikeSensativity = 60•OptionImpliedStrike = 61 Asset The price of the underlying asset. Must be > 0. StrikeOption The price at which the compound option can be purchased if the option is a call or sold if the option is a put. Must be > 0. StrikeUnderly The price at which the underlying asset can be purchased if the option is a call or sold if the option is a put. Must be > 0. TimeExpire Time, expressed in either Days or Years (depending on the TimeFormat value), until the expiration compound and underlying options. Must be > 0. Volatility Annualized volatility of the underlying security. Must be > 0. InterestRate Risk-free interest rate expressed as a percentage. This rate is interpreted as a continuously compounded rate unless otherwise specified in the InterestType argument. Must be > 0. YieldRate Yield, expressed as a percentage (dividends or interest yield), of the underlying asset price. This rate is interpreted as a continuously compounded rate unless specified otherwise in the YieldType argument. Iterations The number of iterations used for the trinomial model. Must be between 5 and 500. MarketPrice Optional. The selling price of the option in the marketplace. This input is required when implied volatility and strike are calculated. Price must be > 0. TimeFormat Optional. Alphanumeric value indicating the format of the time arguments (i.e. TimeExpire). If omitted, Days are used as the default. Specified as either: •Days = 0 or "D" (case insensitive)•Years = 1 or "Y" (case insensitive) InterestType Optional. Alphanumeric value indicating the type of InterestRate to use when evaluating the option. This value is converted to Continuously Compounded for the calculations. If omitted, a Continuously Compounded rate is used. YieldType Optional. Alphanumeric value indicating the type of YieldRate to use when evaluating the option. This value is converted to Continuously Compounded for the calculations. If omitted, a Continuously Compounded rate is used.

Example

# Calculate all of functions for an American compound call on put option whose asset price 225 days from expiration is \$66. The exercise price of the compound call is \$3.5, the exercise price of the underlying call is \$70, the risk-free interest rate is 8% per annum, the yield rate is 5.25% per annum, and the annual volatility is 20%. All of the rates are considered continuous and Iterations = 100. So,

 Input Output Variable Value Function Name Value ExerciseType American 1 Theoretical: 3.841591 OptionType 2 (Call on Put) 2 Delta: -0.456361 Asset 66 3 Gamma: 0.041088 StrikeOption 3.5 4 Theta: -0.006695 StrikeUnderly 70 5 Implied Vol.: 0.207964 TimeExpire 225 6 Vega: 0.198901 Volatility 20% 7 Rho: -0.150289 InterestRate 8% 8 Psi: 0.135487 YieldRate 5.25% 9 Lambda: -7.840450 MarketPrice 4 58 UnderlyStrikeSens: 0.525123 TimeFormat Days 59 UnderlyImpliedStrike: 70.300777 60 OptionStrikeSens: -0.525123 61 OptionImpliedStrike: 3.199221