Abstract:The fundamental defect of the market constructed under a trinomial tree model lies in its incompleteness with initial risk-free and risky assets only. This paper analyzes the first-step probability behaviors of the trinomial tree model and summarizes how could introduce derivatives being a general solution to such a market. The European call option is used for demonstration. This paper further discusses the first-step pricing method for this call option under arbitrary market parameters. Results show that any … Show more
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