Convergence of strategies: An approach using Clark-Haussmann's formula (Q1966382)

The author considers the binomial model that converges to a Black-Scholes model as the number of trading dates increases to infinity. In a binomial model the generating strategy is expressed in terms of the possible prices of the claim and the stock. The price of the claim at time \(t\) is the conditional expactation, under the unique risk neutral measure, of the discount payoff given the information at time \(t\). The author studies the conditional distributions in the binomial model, expresses the generating strategy for a claim in terms of these distributions, and obtaines the conditions, under which this generating strategy converges, in a pathwise sense, to generating strategy in a Black-Scholes model. The weak convergence of the pair consisting of the stock price and the strategy is also studied. Convergence is established under the risk neutral as well as the original measure. The European, Asian, look back and barrier options are analysed as the examples.