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oBIN( ) Net Cost of Carry Definitions

The binomial option pricing model can be validly applied to American-style options on stocks, futures, currencies, and commodities. The appropriate adjustment for options written on each of the underlying assets is incorporated via the net cost of carry parameter. The appropriate settings for each of the underlying assets are listed below:

 

Underlying Asset

Net Cost of Carry

.

Stock - no dividend

b = r

Stock - continuous dividend yield

b = r - q

Futures

b = 0

Currencies

b = r - rf

Commodities

b = r - c

 

 

Where,

b = net cost of carry.

 

r = riskless interest rate.

 

rf = foreign riskless interest rate.

 

q = continuous dividend yield.

 

c = continuous net convenience yield (convenience yield less storage costs) of the underlying asset

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