Abstract: We provide a lean, non-technical exposition on the pricing of path-dependent and European-style derivatives in the Cox-Ross-Rubinstein (CRR) pricing model. The main tool used in the paper for cleaning up the reasoning is applying static hedging arguments. This can be accomplished by taking various routes through some auxiliary considerations, namely Arrow-Debreu securities, digital options or backward random processes. In the last case the CRR model is extended to an infinite state space which leads to an interesting new phenomenon not present in the classical CRR model. At the end we discuss the paradox involving the drift parameter in the BSM model pricing. We provide sensitivity analysis and the speed of converge for the asymptotically vanishing drift.
Recommendations
Cites work
- scientific article; zbMATH DE number 6137478 (Why is no real title available?)
- An Improved Binomial Lattice Method for Multi‐Dimensional Options
- An integrated model for hybrid securities
- Binomial models for option valuation - examining and improving convergence
- Binomial models in finance.
- Binomial valuation of lookback options
- Existence of an Equilibrium for a Competitive Economy
- Generalized Cox-Ross-Rubinstein binomial models
- On the option pricing for a generalization of the binomial model
- Spanning, valuation and options
- Stochastic finance. An introduction in discrete time.
- The pricing of options and corporate liabilities
Cited in
(3)
This page was built for publication: Option pricing: a yet simpler approach
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2145691)
