Completing Market with One Step Trinomial Model: A European Call Approach
- 10.2991/aebmr.k.220307.390How to use a DOI?
- Trinomial tree model; European call option pricing; incomplete market
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.
- © 2022 The Authors. Published by Atlantis Press International B.V.
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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 - 10.2991/aebmr.k.220307.390 ID - Kuang2022 ER -