In this expository paper we illustrate the generality of game theoretic probability protocols of Shafer and Vovk (2001) in finite-horizon discrete games. By restricting ourselves to finite-horizon discrete games, we can explicitly describe how discrete distributions with finite support and the discrete pricing formulas, such as the Cox-Ross-Rubinstein formula, are naturally derived from game-th...

We propose an improved binomial lattice approach for valuing complex option problems whose payoff depends on multiple state variables following correlated geometric Brownian processes. The proposed approach relies on two main ideas: a specific change of time scale as in the log-trasformed binomial approach by Trigeorgis (1991), and a change of basis of the asset span, to trasform them into unco...

In the context of an asset paying affine-type discrete dividends, we present closed analytical approximations for the pricing of European vanilla options in the Black-Scholes model with time-dependent parameters. They are obtained using a stochastic Taylor expansion around a shifted lognormal proxy model. The final formulae are respectively first, second and third order approximations w.r.t. th...

Based on the theory of real options, this paper establishes a investment decision-making model that could evaluate the development of CCS considering some uncertainties: feed-in tariff, the clean price, carbon price, incentives and subsidies from the government and the progress of technology. This model calculates the investment value of CCS project by studying the binomial tree model of real o...

Continuously Paying Options (CPOs) form a very natural class of derivatives for hedging risks coming from adverse movements of a continuously traded asset. We study the rate of convergence of CPOs evaluated under the binomial tree scheme when the payout function φ is piecewise C subject to some boundedness conditions. We show that if φ is continuous, the rate of convergence is n−1 while it is n...

Many firms in the biotechnology industry have significant valuations despite having no product revenue because their products are in early stages of development. In the past ten to fifteen years investors have bid up the stock prices of firms showing promise of developing a blockbuster drug. Using the decision-tree and binomial-lattice methods we compare the value of a biotechnology firm to the...

This paper focuses on modeling foreign exchange return behavior that would result in more accurate currency options pricing. These alternative approaches namely, implied volatility model (IVM), realized volatility model (RVM) and GARCH (1,1) volatility model (GVM) are used in this study. The results, in general suggest that RVM outperforms both IVM and GVM in pricing currency options. In-sample...

We derive a series expansion by Hermite polynomials for the price of an arithmetic Asian option. This requires computation moments and correlators underlying asset which polynomial jump–diffusion process are given analytically; hence, no numerical simulation is required to evaluate series. allows analytical expressions option Greeks. The weight function defining Gaussian density with scale b. f...

Options are tools for managing risk. As financial derivatives, options make markets more complete. This article introduces the concept of options, pricing methods and common trading strategies, uses AAPL as an example to show application strategy in actual investment, which is a good demonstration others understand trading.