eqptree

Build Equal Probabilities stock tree

Syntax

EQPTree = eqptree(StockSpec,RateSpec,TimeSpec)

Description

EQPTree = eqptree(StockSpec,RateSpec,TimeSpec) builds an Equal Probabilities stock tree.

Note

Alternatively, you can use the AssetTree object to price equity instruments. For more information, see Get Started with Workflows Using Object-Based Framework for Pricing Financial Instruments.

Examples

Create EQP Tree

Using the data provided, create a stock specification (StockSpec) using stockspec, a rate specification (RateSpec) using intenvset, and tree time layout specification (TimeSpec) using eqptimespec. Then use these specifications to create an EQP stock tree with eqptree.

Sigma = 0.20;
AssetPrice = 50;
DividendType = 'cash';
DividendAmounts = [0.50; 0.50; 0.50; 0.50];
ExDividendDates = {'03-Jan-2003'; '01-Apr-2003'; '05-July-2003'; 
'01-Oct-2003'};

StockSpec = stockspec(Sigma, AssetPrice, DividendType, ... 
DividendAmounts, ExDividendDates);

RateSpec = intenvset('Rates', 0.05, 'StartDates',... 
'01-Jan-2003', 'EndDates', '31-Dec-2003', 'Compounding', -1);

ValuationDate = '1-Jan-2003';
Maturity = '31-Dec-2003';
TimeSpec = eqptimespec(ValuationDate, Maturity, 4);

EQPTree = eqptree(StockSpec, RateSpec, TimeSpec)

EQPTree = struct with fields:
       FinObj: 'BinStockTree'
       Method: 'EQP'
    StockSpec: [1×1 struct]
     TimeSpec: [1×1 struct]
     RateSpec: [1×1 struct]
         tObs: [0 0.2493 0.4986 0.7479 0.9972]
         dObs: [731582 731673 731764 731855 731946]
        STree: {[50]  [54.4622 44.7798]  [60.5351 49.7555 40.9275]  [66.2890 54.2879 44.4594 36.4104]  [73.8011 60.4400 49.4977 40.5365 33.1977]}
      UpProbs: [0.5000 0.5000 0.5000 0.5000]

Use treeviewer to visualize the tree that you have created.

Input Arguments

StockSpec — Stock specification

structure

Stock specification, specified by the StockSpec obtained from stockspec. See stockspec for information on creating a stock specification.

Data Types: struct

RateSpec — Interest-rate specification for initial risk-free rate curve

structure

Interest-rate specification for initial risk-free rate curve, specified by the RateSpec obtained from intenvset. For information on the interest-rate specification, see intenvset.

Note

The standard equal probabilities tree assumes a constant interest rate, but RateSpec allows you to specify an interest-rate curve with varying rates. If you specify variable interest rates, the resulting tree is not a standard equal probabilities tree.

Data Types: struct

TimeSpec — Tree time layout specification

structure

Tree time layout specification, specified by the TimeSpec obtained from eqptimespec. The TimeSpec defines the observation dates of the EQP stock tree. See eqptimespec for information on the tree structure.

Data Types: struct

Output Arguments

EQPTree — EQP stock tree

structure

EQP stock tree, returned as a structure specifying the time layout for the tree.

More About

Equal Probabilities Stock Tree

The Equal Probabilities stock tree is used in financial modeling to represent the potential future prices of a stock over time.

An Equal Probabilities stock tree is a part of the binomial options pricing model, which is commonly employed to evaluate options and other derivatives. In an equal probabilities stock tree, the future price movements of the stock are modeled using a discrete time framework, where the stock price can either move up or down at each time step with equal probability.

Version History

Introduced before R2006a