Option pricing: a yet simpler approach
| Autor: | Jarno Talponen, Minna Turunen |
|---|---|
| Rok vydání: | 2021 |
| Předmět: |
Lattice model (finance)
Computer science Stochastic process 05 social sciences 01 natural sciences Valuation of options 0502 economics and business 0103 physical sciences Convergence (routing) State space Applied mathematics 010307 mathematical physics Sensitivity (control systems) 050207 economics General Economics Econometrics and Finance Finance |
| Zdroj: | Decisions in Economics and Finance. 45:57-81 |
| ISSN: | 1129-6569 1593-8883 |
| DOI: | 10.1007/s10203-021-00338-7 |
| Popis: | 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 this paper for simplifying the reasoning is applying static hedging arguments. In applying the static hedging principle, we consider Arrow–Debreu securities and 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 $$\mu $$ μ in the Black–Scholes–Merton model pricing. We provide sensitivity analysis and an approximation of the speed of convergence for the asymptotically vanishing effect of drift in prices. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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