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Option pricing for the transformed‐binomial class
Author(s) -
Câmara António,
Chung SanLin
Publication year - 2006
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20218
Subject(s) - binomial options pricing model , trinomial tree , binomial (polynomial) , limiting , class (philosophy) , binomial distribution , econometrics , valuation of options , mathematical economics , finite difference methods for option pricing , capital asset pricing model , rational pricing , economics , asset (computer security) , actuarial science , mathematics , computer science , statistics , engineering , mechanical engineering , computer security , artificial intelligence
This article generalizes the seminal Cox‐Ross‐Rubinstein (1979) 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. © 2006 Wiley Periodicals, Inc. Jrl. Fut Mark 26:759–787, 2006