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International Journal of Fuzzy Systems

, Volume 20, Issue 5, pp 1624–1643 | Cite as

Pricing European Options with Triangular Fuzzy Parameters: Assessing Alternative Triangular Approximations in the Spanish Stock Option Market

  • Jorge de Andrés-Sánchez
Article
  • 81 Downloads

Abstract

The aim of this paper is contributing from a practical and empirical perspective to option pricing under fuzziness. When we evaluate Black–Scholes option pricing formula with triangular fuzzy numbers, we obtain a non-triangular price that may be slightly difficult to use in practical applications. We improve the applicability of the fuzzy version of that formula by proposing and testing three triangular approximations when the subjacent asset price, its volatility and free interest rate are triangular fuzzy numbers. To check the goodness of these approximations, we firstly evaluate their closeness to the actual values of fuzzy Black and Scholes model. We find that the quality of those approximations depends on options maturity and moneyness grade and if we are pricing call or put options. We also assess the capability of those approximating methods to reflect satisfactorily real market prices and obtain good results. To develop all empirical applications, we use a sample of options on IBEX35 traded in the Spanish derivatives market on 3/1/2017.

Keywords

Fuzzy numbers Fuzzy number approximation Finance Option pricing Black–Scholes formula 

Notes

Acknowledgements

The author thanks anonymous reviewers for their constructive comments and suggestions.

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Copyright information

© Taiwan Fuzzy Systems Association and Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.University Rovira i VirgiliSocial and Business Research Laboratory, Department of Business ManagementReusSpain

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