Abstract
KEY TAKEAWAYS:
Combining Excel’s =LAMBDA and =MAKEARRAY functions allows for the creation of user-defined functions for producing large binomial trees in less than a second.
Further applications of the user-defined functions allow for very quick valuations of European and American style options with large binomial trees. Applying similar techniques allows for the calculation of value-at-risk (VaR) measures.
Because the binomial tree has a certain structure, a ratio can be computed that determines how the portfolio is performing through time relative to the VaR calculation. A high (low) ratio relative to the amount of the time horizon that has elapsed indicates the VaR “worst case” scenario is less (more) likely to be realized. Risk mitigation techniques can then be applied accordingly.
Quickly Generated Binomial Tree Applications for Options and VaR in Excel without VBA
New functionality in Excel allows for the creation of more extensive user-defined functions without VBA programming. Binomial tree applications are generated that can produce large trees in less than a second. Further applications allow for the pricing of European and American style options and value-at-risk (VaR) calculations. Because the binomial tree has a defined structure, a ratio can be calculated to determine if a portfolio is performing well enough through time to avoid the “worst case” scenarios measured by VaR.
Document Type
Working Paper
Publication Date
1-14-2025
Publisher Statement
Please note that downloads of this working paper are for private/personal use only. Do not cite without permission.
Recommended Citation
Arnold, Tom, C. Mitchell Conover, Joseph Farizo and Nancy Tran. “Quickly Generated Binomial Tree Applications for Options and VaR in Excel without VBA.” University of Richmond, (January, 2025): 1-28.