Using Computer Algebra Packages to Complement the Spreadsheet Construction of Binomial Option Trees: The Example of Mathcad

In this paper we show how the mathematical programming package Mathcad can be used to complement the construction of a binomial option tree in Excel. A binomial option tree is first constructed in Excel using standard spreadsheet 'cut and paste' operations. The same binomial tree is then constructed in Mathcad. We conclude that spreadsheet construction of the tree provides students with a sound concept of the underlying mechanics of the option tree. Additionally, the Mathcad construction reinforces the mathematical notation found in many option pricing texts (e.g. summation signs and indices) and allows for the construction of a more flexible lattice that may be easily altered (e.g. the number of steps). In the process students are provided with an understanding of how to construct option trees in the increasingly important world of computer algebra packages.