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http://hdl.handle.net/1942/10642
Title: | 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. | Authors: | MERCKEN, Roger MOTMANS, Lisette HOUBEN, Ghislain |
Issue Date: | 2010 | Publisher: | Danubius University of Galati | Source: | EURO ECONOMICA, 24(1). p. 63-70 | Abstract: | 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. | Notes: | Hasselt University, Faculty of Business Economics, KIZOK, roger.mercken@uhasselt.be - Hasselt University, Faculty of Business Economics, ZW, lisette.motmans@uhasselt.be - Hasselt University, Faculty of Business Economics, KIZOK, ghislain.houben@uhasselt.be | Document URI: | http://hdl.handle.net/1942/10642 | Link to publication/dataset: | http://journals.univ-danubius.ro/index.php/euroeconomica/article/view/267 | ISSN: | 1582-8859 | Category: | A2 | Type: | Journal Contribution |
Appears in Collections: | Research publications |
Files in This Item:
File | Description | Size | Format | |
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Calloptions.pdf | Non Peer-reviewed author version | 93.64 kB | Adobe PDF | View/Open |
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