T decision analysis methods can provide an intuitive approach to valuing projects with managerial flexibility or real options. The discrete-time approach to real-option valuation has typically been implemented in the finance literature using a binomial lattice framework. Instead, we use a binomial decision tree with risk-neutral probabilities to approximate the uncertainty associated with the c...

A generalized correlated random walk is a process of partial sums Xk = ∑kj=1 Yj such that (X, Y ) forms a Markov chain. For a sequence (X) of such processes in which each Y j takes only two values, we prove weak convergence to a diffusion process whose generator is explicitly described in terms of the limiting behaviour of the transition probabilities for the Y. Applications include asymptotics...

The increasingly dynamic nature of businessto-business electronic commerce has produced a recent shift away from fixed pricing and toward flexible pricing. Flexible pricing, as defined here, includes both differential pricing, in which different buyers may receive different prices based on expected valuations, and dynamic-pricing mechanisms, such as auctions, where prices and conditions are bas...

A systematic analysis of a continuous version of a binomial lattice, containing a real parameter γ and covering the Toda field equation as γ → ∞, is carried out in the framework of group theory. The symmetry algebra of the equation is derived. Reductions by one–dimensional and two–dimensional subalgebras of the symmetry algebra and their corresponding subgroups, yield notable field equations in...

Consider the task of summarizing the data in Figure 1. A common technique for performing this task is to use a statistical model known as a mixture model. Relative to many other models for estimating densities, mixture models have a number of advantages. First, mixture models can summarize data that contain multiple modes. In this sense, they are more powerful than distributions from the expone...

In this paper we study Binomial Models with random time steps. We explain, how calculating values for European and American Call and Put options is straightforward for the Random{Time Binomial Model. We present the conditions to ensure weak{convergence to the Black{Scholes setup and convergence of the values for European and American put options. Di erently to the CRR{model the convergence beha...

The simplest model for pricing d erivative securities is the binomial model. It generalizes the o n e period \up-down" model of Chapte r 1 t o a m ulti-period setting, assuming t hat t he price of the u nderlying asset follows a random walk. In the binomial model, there are N trading periods and N+1 trading d ates, t 0 t 1 ::: t N when it is possible to i n vest in a risky security with p r i c...

The paper reports an experiment on the pricing of financial options. Arbitrage-free option pricing is tested against three hypotheses based on mental accounting. The data show that, even with considerable experience, unexploited arbitrage opportunities persist. Subjects do not seem to make the connections between the different investment possibilities, as essential for arbitrage-free pricing (A...

The Pricing of Options on Credit-Sensitive Bonds We build a three-factor term-structure of interest rates model and use it to price corporate bonds. The first two factors allow the risk-free term structure to shift and tilt. The third factor generates a stochastic credit-risk premium. To implement the model, we apply the Peterson and Stapleton (2002) diffusion approximation methodology. The met...

We show for every k ≥ 1 that the binomial tree of order 3k has a vertex-coloring with 2k+1 colors such that every path contains some color odd number of times. This disproves a conjecture from [1] asserting that for every tree T the minimal number of colors in a such coloring of T is at least the vertex ranking number of T minus one.