Proceedings of the 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022)

Completing Market with One Step Trinomial Model: A European Call Approach

Authors
Yang Kuang1, *, Chengqian Lin2, Nan Yang3
1John Muir College, University of California, La Jolla, CA 92093, United States
2Bayes Business School(formerly Cass)City, University of London, London EC1Y 8TZ, United Kingdom
3Queen Mary University of London, London, E1 4NS, United Kingdom
*Corresponding author. Email: yakuang@ucsd.edu
Corresponding Author
Yang Kuang
Available Online 26 March 2022.
DOI
https://doi.org/10.2991/aebmr.k.220307.390How to use a DOI?
Keywords
Trinomial tree model; European call option pricing; incomplete market
Abstract

The fundamental defect of the market constructed under a trinomial tree model lies in its incompleteness with initial risk-free and risky assets only. This paper analyzes the first-step probability behaviors of the trinomial tree model and summarizes how could introduce derivatives being a general solution to such a market. The European call option is used for demonstration. This paper further discusses the first-step pricing method for this call option under arbitrary market parameters. Results show that any derivatives being linearly independent of initial primary assets could complete such a market. When pricing such derivatives, their portfolio should be bounded by three sub-binomial tree structures that recombined from three possible branches of the initial model.

Copyright
© 2022 The Authors. Published by Atlantis Press International B.V.
Open Access
This is an open access article under the CC BY-NC license.

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Volume Title
Proceedings of the 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022)
Series
Advances in Economics, Business and Management Research
Publication Date
26 March 2022
ISBN
978-94-6239-554-1
ISSN
2352-5428
DOI
https://doi.org/10.2991/aebmr.k.220307.390How to use a DOI?
Copyright
© 2022 The Authors. Published by Atlantis Press International B.V.
Open Access
This is an open access article under the CC BY-NC license.

Cite this article

TY  - CONF
AU  - Yang Kuang
AU  - Chengqian Lin
AU  - Nan Yang
PY  - 2022
DA  - 2022/03/26
TI  - Completing Market with One Step Trinomial Model: A European Call Approach
BT  - Proceedings of the 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022)
PB  - Atlantis Press
SP  - 2384
EP  - 2388
SN  - 2352-5428
UR  - https://doi.org/10.2991/aebmr.k.220307.390
DO  - https://doi.org/10.2991/aebmr.k.220307.390
ID  - Kuang2022
ER  -