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Option pricing for the transformed-binomial class

✍ Scribed by António Câmara; San-Lin Chung

Publisher
John Wiley and Sons
Year
2006
Tongue
English
Weight
267 KB
Volume
26
Category
Article
ISSN
0270-7314

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✦ Synopsis

This article generalizes the seminal Cox-Ross- binomial option pricing model to all members of the class of transformed-binomial pricing processes. The investigation addresses issues related with asset pricing modeling, hedging strategies, and option pricing. Formulas are derived for (a) replicating or hedging portfolios, (b) risk-neutral transformed-binomial probabilities, (c) limiting transformed-normal distributions, and (d) the value of contingent claims, including limiting analytical option pricing equations. The properties of the transformed-binomial class of asset pricing processes are also studied. The results of the article are illustrated with several examples.

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