Two-State Option Pricing: Binomial Models Revisited

✍ Scribed by George M. Jabbour; Marat V. Kramin; Stephen D. Young

• Publisher: John Wiley and Sons
• Year: 2001
• Tongue: English
• Weight: 112 KB
• Volume: 21
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.2101

✦ Synopsis

Abstract

This article revisits the topic of two‐state option pricing. It examines the models developed by Cox,
Ross, and Rubinstein (1979), Rendleman and Bartter (1979), and Trigeorgis (1991)
and presents two alternative binomial models based on the continuous‐time and discrete‐time
geometric Brownian motion processes, respectively. This work generalizes the standard binomial approach,
incorporating the main existing models as particular cases. The proposed models are straightforward and
flexible, accommodate any drift condition, and afford additional insights into binomial trees and lattice models
in general. Furthermore, the alternative parameterizations are free of the negative aspects associated with the
Cox, Ross, and Rubinstein model. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:987–1001,
2001