2010•Digital Library of the Belarusian State University (Belarusian State University)Open access

Markov-binomial option pricing model

Petar Radkov, Leda D. Minkova

Abstract

The paper presents a discrete-time model of nancial market, where the risky \nreturns form a two-state Markov chain. The model gives rise to a simple numer- \nical procedure for valuing European options. The generalization of the classical \nCox-Ross-Rubinstein formula is derived. The price of European call option is \nestimated by Monte - Karlo simulation.

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Key concepts: Trinomial tree, Binomial options pricing model, Econometrics, Markov model, Binomial (polynomial), Binomial distribution, Markov chain, Economics