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
Roger Mercken (),
Lisette Motmans () and
Ghislain Houben ()
Additional contact information
Roger Mercken: Hasselt University, Faculty of Business Economics, KIZOK
Lisette Motmans: Hasselt University, Faculty of Business Economics, KIZOK
Ghislain Houben: Hasselt University, Faculty of Business Economics, KIZOK
EuroEconomica, 2010, issue 24, 64-71
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.
Keywords: investments; stock; Black-Scholes; volatility (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
http://journals.univ-danubius.ro/index.php/euroeconomica/article/view/267/250 (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:dug:journl:y:2010:i:24:p:64-71
Access Statistics for this article
More articles in EuroEconomica from Danubius University of Galati Contact information at EDIRC.
Bibliographic data for series maintained by Florian Nuta ().