Option Pricing for the Transformed Binomial Class

Journal of Futures Markets, Vol. 29, pp. 537-557, 2006

38 Pages Posted: 10 Aug 2005 Last revised: 3 Sep 2008

See all articles by Antonio Camara

Antonio Camara

Oklahoma State University, Stillwater - College of Business Administration

San-Lin Chung

National Central University - Department of Finance

Date Written: October 23, 2005

Abstract

This paper generalizes the seminal Cox-Ross-Rubinstein (1979) binomial option pricing model to all members of the class of transformed-binomial pricing processes. Our investigation addresses issues related with asset pricing modeling, hedging strategies, and option pricing. We derive explicit formulae for (1) replicating or hedging portfolios; (2) risk-neutral transformed-binomial probabilities; (3) limiting transformed-normal distributions; and (4) the value of contingent claims, including limiting analytical option pricing equations. We also study the properties of the transformed-binomial class of asset pricing processes. We illustrate the results of the paper with several examples.

Keywords: Option pricing, binomial, transformed-normal

JEL Classification: G13

Suggested Citation

Camara, Antonio and Chung, San-Lin, Option Pricing for the Transformed Binomial Class (October 23, 2005). Journal of Futures Markets, Vol. 29, pp. 537-557, 2006, Available at SSRN: https://ssrn.com/abstract=778484

Antonio Camara (Contact Author)

Oklahoma State University, Stillwater - College of Business Administration ( email )

201 Business
Stillwater, OK 74078-0555
United States

San-Lin Chung

National Central University - Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan
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