Numerical backward recursion solves option problems that resist analytic solution

Evidence

The “tree” can be elaborated to take into account dividends, and `American” as well as “European” options can be treated (the former can be exercised at any time up to their expiration, raising the need to examine when early exercise may be rational). Such problems can become intractable analytically, but the Cox-Ross-Rubinstein model allows them to be solved numerically and recursively by working “backwards” through the tree. — Donald MacKenzie, An Engine, Not a Camera, 1287

Categorization

• DEFINE: Defines American vs European options and the backward-recursion solution technique.
• XREF: connects to: The Cox-Ross-Rubinstein model made option pricing computable numerically. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 618; The dynamic hedge ratio at the core of option pricing resisted analytic solution. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 577

Broader Connections

• The Cox-Ross-Rubinstein model made option pricing computable numerically. #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 618
• The dynamic hedge ratio at the core of option pricing resisted analytic solution. #qualifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 577