Malliavin calculus in a binomial framework

Abstract

The binomial model is a standard framework used to introduce risk neutral pricing of financial assets. Martingale representation, backward stochastic differential equations, and the Malliavin calculus are difficult concepts in a continuous-time setting. This paper presents these ideas in the simple, discrete-time binomial model. KEYWORDS backward stochastic differential equation, binomial model, Malliavin calculus 774