Research on Water Option Pricing Problem Based on the Binary Tree Model

Abstract

Along with the progress of the water-saving technology, the water users who have excess water resources by using water saving technology may transfer the spare water rights to whom with water shortage. As a new attempt to water rights transaction, water options transaction has fully showed its efficiency and flexibility, and the water options pricing problem is the key problem in the process of trading. Using market mechanism enables water users participate in water rights transaction independently, water users who have excess water resources hold American put options based on the water rights, can use the binary tree pricing model to analyze the value of the American put option at various stages to help them deciding whether to perform rights or give up rights.