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An Explicit Formula for Option Pricing in Discrete Incomplete Markets

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  • Grażyna Wolczyńska

    (Institute of Mathematics, Jagiellonian University, Reymonta 4, 30–059 Kraków, Poland)

Abstract

Some aspects of the pricing of European call option are disscussed. We consider the simplest case of an incomplete market in the situation when the model of the market is discrete and increments of shares prices have a multinomial distribution. We look for similarities between this model and the model of Cox, Ross and Rubinstein. In particular we consider the possibility of using induction backwards and we look for an optimal price and strategy using the method of risk-minimization step by step from the date of realizationTto 0.

Suggested Citation

  • Grażyna Wolczyńska, 1998. "An Explicit Formula for Option Pricing in Discrete Incomplete Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(02), pages 283-288.
    • Handle: RePEc:wsi:ijtafx:v:01:y:1998:i:02:n:s0219024998000151
    DOI: 10.1142/S0219024998000151
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    Keywords

    Incomplete markets; derivative securities;

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