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Two‐State Option Pricing: Binomial Models Revisited

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  • George M. Jabbour
  • Marat V. Kramin
  • Stephen D. Young

Abstract

This article revisits the topic of two‐state option pricing. It examines the models developed by Cox, Ross, and Rubinstein (1979), Rendleman and Bartter (1979), and Trigeorgis (1991) and presents two alternative binomial models based on the continuous‐time and discrete‐time geometric Brownian motion processes, respectively. This work generalizes the standard binomial approach, incorporating the main existing models as particular cases. The proposed models are straightforward and flexible, accommodate any drift condition, and afford additional insights into binomial trees and lattice models in general. Furthermore, the alternative parameterizations are free of the negative aspects associated with the Cox, Ross, and Rubinstein model. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:987–1001, 2001

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  • George M. Jabbour & Marat V. Kramin & Stephen D. Young, 2001. "Two‐State Option Pricing: Binomial Models Revisited," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(11), pages 987-1001, November.
    • Handle: RePEc:wly:jfutmk:v:21:y:2001:i:11:p:987-1001
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    Cited by:

    1. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite [The Theory of Fair Geometric Returns]," MPRA Paper 87082, University Library of Munich, Germany.
    2. Milanesi, Gastón, 2021. "Modelo de valoración con opciones reales, rejillas trinomial, volatilidad cambiante, sesgo y función isoelástica de utilidad || Valuation model with real options, trinomial lattice, changing volatilit," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 32(1), pages 257-273, December.

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