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Please use this identifier to cite or link to this item: 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
Citation: 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
URI: http://hdl.handle.net/1942/10642
Link to publication: http://journals.univ-danubius.ro/index.php/euroeconomica/article/view/267
ISSN: 1582-8859
Category: A2
Type: Journal Contribution
Appears in Collections: Research publications

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