Option pricing for the transformed-binomial class

António Câmara, San Lin Chung*

*Corresponding author for this work

Research output: Contribution to journalJournal Article peer-review

5 Scopus citations

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.

Original languageEnglish
Pages (from-to)759-788
Number of pages30
JournalJournal of Futures Markets
Volume26
Issue number8
DOIs
StatePublished - 08 2006
Externally publishedYes

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