A Discrete Time Financial Option Pricing Model for Cloud Services

Option pricing is one of the most challenging problems in computational finance and derivative modeling. As a result, one has to resort to computational approaches since it is difficult to obtain closed form solution for options other than simple options such as European style options. Also, due to the complex nature of the governing mathematics, several numerical approaches have been proposed in the past to price American style options as well as complex options. In the current study, we apply trinomial lattice which has been used in many scientific and engineering applications to model option pricing for assets with high volatility. The three novelties of this paper include, the formulation of cloud asset price using stochastic process, the improvement of the American style option pricing algorithm by integrating our option pricing factor (pf) into the algorithm, and the presentation of the computed option values for various strike price. With carefully select strike-price spacing, we guarantee a fine-grain integration of pf into the trinomial lattice.