Option pricing: A simplified approach

by: John C Cox, Stephen A Ross, Mark Rubinstein

Journal of Financial Economics, Vol. 7, No. 3. (September 1979), pp. 229-263.

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Abstract

This paper presents a simple discrete-time model for valuing options. The fundamental economic principles of option pricing by arbitrage methods are particularly clear in this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Black-Scholes model, which has previously been derived only by much more difficult methods. The basic model readily lends itself to generalization in many ways. Moreover, by its very construction, it gives rise to a simple and efficient numerical procedure for valuing options for which premature exercise may be optimal.

@article{citeulike:406295, abstract = {This paper presents a simple discrete-time model for valuing options. The fundamental economic principles of option pricing by arbitrage methods are particularly clear in this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Black-Scholes model, which has previously been derived only by much more difficult methods. The basic model readily lends itself to generalization in many ways. Moreover, by its very construction, it gives rise to a simple and efficient numerical procedure for valuing options for which premature exercise may be optimal.}, author = {Cox, John C. and Ross, Stephen A. and Rubinstein, Mark }, citeulike-article-id = {406295}, doi = {http://dx.doi.org/10.1016/0304-405X(79)90015-1}, journal = {Journal of Financial Economics}, keywords = {black-scholes, derivatives, finance, options}, month = {September}, number = {3}, pages = {229--263}, posted-at = {2006-02-01 00:00:34}, priority = {2}, title = {Option pricing: A simplified approach}, url = {http://dx.doi.org/10.1016/0304-405X(79)90015-1}, volume = {7}, year = {1979} }

RIS record

TY - JOUR ID - citeulike:406295 L3 - citeulike-article-id:406295 TI - Option pricing: A simplified approach JF - Journal of Financial Economics VL - 7 IS - 3 SP - 229 EP - 263 N2 - This paper presents a simple discrete-time model for valuing options. The fundamental economic principles of option pricing by arbitrage methods are particularly clear in this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Black-Scholes model, which has previously been derived only by much more difficult methods. The basic model readily lends itself to generalization in many ways. Moreover, by its very construction, it gives rise to a simple and efficient numerical procedure for valuing options for which premature exercise may be optimal. KW - black-scholes KW - derivatives KW - finance KW - options AU - Cox, John AU - Ross, Stephen AU - Rubinstein, Mark PY - 1979/09// UR - http://dx.doi.org/10.1016/0304-405X(79)90015-1 ER -

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