IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

No more replicating portfolios : a simple convex combination to understand the risk-neutral valuation method for the multi-step binomial valuation of a call option

  • Roger MERCKEN


    (Hasselt University, Faculty of Business Economics, KIZOK)

  • Lisette MOTMANS


    (Hasselt University, Faculty of Business Economics, KIZOK)

  • Ghislain HOUBEN


    (Hasselt University, Faculty of Business Economics, KIZOK)

Registered author(s):

    This paper covers the valuation, from beginning to implementation, of a European call option on a stock using the multi-step binomial model in a risk-neutral world. The aim is to introduce this model in a simple but rather unconventional way. The usual presentation of the risk-neutral valuation, see Hull (2009),among others, relies on replicating portfolios. For most practitioners, this technique looks rather mysterious. We present a new transparent analysis requiring no replicating portfolios. The new finding to understand why the risk-neutral pricing is consistent with investors being risk-averse is the notion of a convex combination.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Article provided by Danubius University of Galati in its journal Euroeconomica.

    Volume (Year): (2010)
    Issue (Month): 24 (March)
    Pages: 64-71

    in new window

    Handle: RePEc:dug:journl:y:2010:i:24:p:64-71
    Contact details of provider: Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:dug:journl:y:2010:i:24:p:64-71. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Florian Nuta)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.