Abstract
An option is a contract between two parties in which the option holder has the right to buy or sell a certain amount of instrument at a certain price within a predetermined period of time. The purpose of this study was to determine the price of buy and sell european type options using the regime switching lognormal 2-state model. The parameters of the regime switching lognormal 2-state model are estimated using the EM Algorithm. This study used secondary data on stock prices with parameter estimation results showing a standard deviation in state-1 of 0.025543 with an average of 0.006355 and a standard deviation in state-2 of 0.051013 with an average of -0.005482. The estimated results obtained the price of european type selling and buying options of 98.40 and 1033.48 respectively for the execution price of 4000.
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