Abstract:

We consider a market model with a discrete time, being a generalization of the Cox-Ross-Rubinstein model, in which the assumption about the knowledge of base assets price distribution is weakened. Then we present the algorithm of valuating and hedging options in this model. The approach used allows a valuation of a wide range of contingent claims, including basket and Asian options. The algorithm takes into account transaction costs in very general form. In case without transaction costs we give intuitive geometric interpretations of the obtained prices and hedging strategies expressed in terms of convex analysis.