Multinomial Lattices and Derivatives Pricing

George M. Jabbour, Marat V. Kramin, Timur Kramin and Stephen D. Young
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George M. Jabbour: The George Washington University, 2023 G Street, Room 530, Washington DC, 20052, USA
Marat V. Kramin: Fannie Mae Portfolio Strategy Department, 2500 Wisconsin Avenue, #141, Washington DC, 20007, USA
Stephen D. Young: Wachovia Securities Equity Derivatives Group, 5000 Morrowick Road, Charlotte, NC 28226, USA

Chapter 1 in Advances in Quantitative Analysis of Finance and Accounting:New Series, 2005, pp 1-15 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis article elaborates an n-order multinomial lattice approach to value derivative instruments on asset prices characterized by a lognormal distribution. Nonlinear optimization is employed, specified moments are matched, and n-order multinomial trees are developed. The proposed methodology represents an alternative specification tomodels of jump processes of order greater than three developed by other researchers. The main contribution of this work is pedagogical. Its strength is in its straightforward explanation of the underlying tree building procedure for which numerical efficiency is a motivation for actual implementation.

Keywords: Derivatives Pricing; Path Analysis; Spillover; Effective Interest Rate; Higher Moments; NASDAQ; Covered Call Investing; Index Securities; Hedging; Asset Pricing; CFA Designation (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (3)

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