Option pricing for the transformed-binomial class
Journal
Journal of Futures Markets
Journal Volume
26
Journal Issue
8
Pages
759-787
Date Issued
2006
Author(s)
C?mara A.
Abstract
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.
Type
journal article