How fundamental is the one-period trinomial model to European option pricing bounds. A new methodological approach

Braouézec, Yann

doi:10.1016/j.frl.2016.11.001

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Pricing the Call Option1

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2022

2024

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Cited by 2 publications

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“…One may notice that the European call is also under the trinomial tree model and its replication is like which in Theorem 3.1 hence overdetermined. oowever, the price of a call is rather "flexible" if it captures most payoffs [2,3]. By giving the degree of freedom to variables, we can calculate the second-best scenario and know the boundaries for pricing.…”

Section: Pricing the Call Optionmentioning

confidence: 99%

Completing Market with One Step Trinomial Model: A European Call Approach

Yang¹,

Lin²,

Yang³

2022

Proceedings of the 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022)

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The fundamental defect of the market constructed under a trinomial tree model lies in its incompleteness with initial risk-free and risky assets only. This paper analyzes the first-step probability behaviors of the trinomial tree model and summarizes how could introduce derivatives being a general solution to such a market. The European call option is used for demonstration. This paper further discusses the first-step pricing method for this call option under arbitrary market parameters. Results show that any derivatives being linearly independent of initial primary assets could complete such a market. When pricing such derivatives, their portfolio should be bounded by three sub-binomial tree structures that recombined from three possible branches of the initial model.

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Section: Pricing the Call Optionmentioning

confidence: 99%