PRICING UNDER BERNOULLI DYNAMICS

The following sections are included:

• The Structure of Bernoulli Dynamics

• Self-Financing Portfolios in Discrete Time

• Replication and Binomial Pricing

• Interpreting the Binomial Solution

  • The P.D.E. Interpretation

  • The Risk-Neutral or Martingale Interpretation

• Specific Applications

  • European Stock Options

  • Binomial Pricing of Futures and Futures Options

  • American-Style Derivatives

  • Derivatives on Assets That Pay Dividends

• Implementing the Binomial Method

  • Modelling the Dynamics

  • Efficient Calculation

• Inferring Trees from Option Prices

  • Assessing the Implicit Risk-Neutral Distribution of S_T

  • Building the Tree

  • Appraisal